Successful legal action sees Manchester Building Society’s interim results soar
Manchester Building Society has reported a £22m pre-tax profit for the six months to June 30, compared with a £393,000 loss in the same period last year.
It follows the award of £21.8m to the society by the Supreme Court following the legal action it took against its former auditors, Grant Thornton (UK), and associated costs and interest.
Damages and interest of £14.3m are included within income, while £7.5m in relation to the interim cost payment received from Grant Thornton is included as a negative expense.
This interim cost payment covers both costs previously paid to Grant Thornton following the judgments of the lower courts, and costs incurred in pursuing the legal action.
The society, based in Portland Street, Manchester, also expects to be awarded additional costs and interest, but these have not been recognised at June 30, 2021, as their values are still to be determined.
Net interest income for the six month period was £3.111m, slightly down on £3.141m the previous year.
The accounts have been prepared on a going concern basis of accounting and, in line with previous accounts, continue to set out a “material uncertainty” regarding the long term future of the society.
It said it is considering its strategic options following the judgment of the Supreme Court, but currently it continues to follow its existing medium to long term strategic plan. The run-off of the balance sheet within that plan means there remains a material uncertainty to the ability of the group and society to continue as a going concern in the medium to long term.
As at June 30, 2021, the group continued to have headroom above its Total Capital Requirements (TCR) in total capital terms.
The profit generated by the award of the damages and the interim interest and cost payment means the society now meets the required qualitative standards for the level of Common Equity Tier 1 (CET 1) capital for the first time since 2016.
The society said it continues to have a strong liquidity position.
On March 25, 2021, the society announced the non-payment of the April 2021 coupon on its two tranches of Permanent Interest Bearing Share (PIBS), as a result of the shortfall against qualitative standards for the level of CET 1 regulatory capital.
However, the board said it expects to be able to make the PIBS coupon payments, which become due in October 2021, but recognises that there continues to be uncertainty over the group’s ability to make coupon payments in the medium to long term.
The legal action against Grant Thornton dates back to 2013, and arose from negligent advice given by Grant Thornton concerning the use of ‘hedge accounting’ to reduce the volatility of the mark-to-market value of swaps in its accounts.
The error forced the society to close out its long-term swaps, which caused a multimillion-pound loss and meant that it had to source emergency funding.
In 2018 the High Court awarded the society just £315,345, plus interest, of its original £49m legal claim against Grant Thornton.
In May that year the society was told it would have to pay almost £2m in court costs, raising concerns for its long-term prospects.
There were subsequent appeals, and in October 2020, the Supreme Court heard the society’s latest appeal. A seven-judge panel unanimously determined that the losses suffered by the society were within the scope of Grant Thornton’s duty.
Following the verdict, announced in June this year, Manchester Building Society chairman, David Harding, said: “It was always clear to the society that our claim had merit and that it was in the interests of our members to pursue the claim up to the highest court to recover compensation from Grant Thornton.”
Shares in the society have improved from 33.375p per share ahead of the Supreme Court verdict announcement in June, to 92p per share.