Keith Collister, Business Writer

In this combination photograph, Richard K. Powell (right), group president and CEO, Victoria Mutual, addresses members of the society at the 128th annual general meeting of the Victoria Mutual Building Society (VMBS) held at its Half-Way Tree, St. Andrew, office recently. The AGM was convened to receive and adopt the directors' and auditors' reports and statement of accounts for year ended December 31, 2006. The Victoria Mutual Group's revenue and expenditure account shows gross revenue of $5.43 billion and net surplus of $543.85 million. - Contributed photos

Victoria Mutual Building Society (VMBS) says the competition in the mortgage loan increased from both public and private sector institutions last year.

In their 2006 annual report, presented to VMBS members and staff at their annual general meeting held on July 26, VMBS said the improvement in the benefits provided by the National Housing Trust (NHT) to its contributors was the main engine behind the growth in competition.

"Benefit increases by the NHT have the deleterious effect of reducing the potential mortgage market available to private sector institutions, including your society," the annual report stated.

President and CEO Richard Powell, responding to questions at the AGM, noted that over the past couple of years NHT benefit levels had increased twice, while interest rates had been lowered twice. This has raised concerns on whether the NHT was now encroaching on the private market. In his view, decisions were being taken that affected the mortgage market without consultation with the industry.

According to Powell, the average size of a VMBS mortgage loan last year was $3 million, while the maximum NHT loan has been increased from $3 million to $3.5 million. Mr. Powell noted, however, that VMBS had a strong partnership with the NHT through their joint mortgage financing programme, and that "NHT stimulated more effective demand for housing".

The chairman's report also noted the "intense competitive forces in the sector", which included "commercial banks, credit unions and securities dealers".

"Significantly, by the third quarter of 2006, both traditional building societies offered special promotions that reduced the interest rate to a low of 12.99 per cent", representing "the lowest mortgage rate available in Jamaica from non-governmental financial institutions in more than 25 years."

Powell advised that in former years of the mortgage market, financial institutions put their funds in government paper at much higher rates than they could get from lending by way of mortgages, effectively making mortgages a "rationed" item. However, Jamaican financial institutions, like their overseas peers, now see mortgages as an attractive investment vehicle, with the result being ever increasing competition in this area.

Need for greater administrative efficiency

The net interest margin available to meet administration costs has also declined along with mortgage rates over the past few years. The ratio of administration costs (non-interest expenses) to average assets is the key statistic for measuring the efficiency of building societies.

VMBS' CEO noted that the ratio of administrative costs to average assets was one per cent for United Kingdom building societies of a similar size to VMBS, whereas in Jamaica the ratio was nearly five per cent. This means that Jamaican building societies have to earn a net interest margin (interest revenues minus costs over average assets) of five per cent just to pay for their overheads.

However, while noting that our administration costs were five times higher, Powell said it severely underestimated the extent of the efficiency gap, as in the U.K. 85 per cent of building societies' assets were in mortgages versus only about 40 per cent in Jamaica. The majority of assets are vested in government paper, which incur very little administrative cost.

This low figure for mortgage investment as a percentage of their total assets is partly due to both major building societies having major foreign liabilities, but being unable to find mortgage assets with a high enough yield in currencies such as British pounds. U.K. mortgages typically yield only 5.5 to 6.0 per cent, or less than half Jamaican levels.

Credit Quality Improving

VMBS's ratio of loans over 90 days in arrears to total loans fell from over five per cent to just under four per cent, despite responding to greater competition through product changes, including higher loan-to-value ratios.

Building society loans are almost entirely first mortgages on residences, while bank loans are much more diverse, ranging from unsecured credit card loans to business loans. Banks should, therefore, have more capital than the building societies.

In Jamaica, however, building societies are regulated like the banks, and required to earn on assets of at least one per cent, which means that, other things being equal, their rates are worse than those offered in the U.K.

This is because in the U.K., building societies are expected to return the value created to their members (both savers and mortgagors), and hence they don't earn much profit. As a result, their return on assets is typically in the 0.25-0.4 per cent range.

Improved Performance

Despite the challenges of growing their mortgage book, and management's concern over the continuing trend of increasing administrative expenses, the performance of VMBS Group as measured by pre-tax surplus improved to $544 million, up from $371 million in the previous year.

Victoria Mutual Wealth Management had a flat performance, however, reflecting the poor performance of the stock market and falling margins on their asset management business. Victoria Mutual is currently looking for a new general manager to replace David Wan who resigned recently.