Legal win boosts society’s annual results, but doubts over long term PIBS payments

Manchester Building Society has reported a huge increase in annual profits, on the back of its successful legal action against business adviser Grant Thornton.

The organisation, based in Portland Street, reported total operating income for the 12 months to December 31, 2021, of £19.44m, compared with £7.022m the previous year.

This year’s income included £14.272m of legal damages and interest.

The pre-tax profit for the period was £20.837m, against a pre-tax loss of £344,000 in 2020.

The society announced its interim results last August which revealed the award of £21.8m by the Supreme Court following the legal action it took against its former auditors, Grant Thornton (UK), and associated costs and interest.

In its annual results announcement, the society said its underlying performance in 2021 was impacted by the continued economic uncertainty in both the UK and worldwide in relation to the ongoing COVID-19 pandemic.

The group recorded an impairment of £1.3m, being £1.4m relating to the society’s Spanish lifetime portfolio offset by a small credit impairment release relating to the UK portfolios.

Its reserves increased in 2021 by £19.1m to accumulated profits of £8.1m. This reserves movement includes a £0.3m reduction for interest paid on Equity PIBS (Permanent Interest Bearing Share).

The society said it continues to have a strong liquidity position.

As at December 31, 2021, following the profit generated in the year, the group meets all of the quantitative and qualitative requirements regarding the level of regulatory capital it must hold.

It said it continues to follow a medium to long term strategic plan which shows that the society remains viable in the medium term and it has significant headroom against this plan.

Although largely mitigated by the profits generated in 2021, the society said it is recognised that there remain long term risks to this plan, particularly following a stress event in the economy or financial markets.

The society made the coupon payments on both its issuances of PIBS in October 2021, for the first time since April 2016.

This was previously prohibited under the applicable regulatory capital conservation rules.

However, it said while the society continues to manage down the size of the balance sheet, there remains some uncertainty over its ability to make PIBS coupon payments in the 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.