THE 125,000 members at Irish Nationwide Building Society must be wondering whether the society has missed the boat when it comes to its long-planned demutualisation and sale, writes Gretchen Friemann

Investors have piled into the society in recent years in the expectation of a significant financial windfall. Such has been demand that the society has raised the threshold for new members to €20,000.

Former managing director Michael Fingleton had placed demutualisation centre stage in the society's agenda for much of the past decade and must have expected that it would materialise well before he had to step down from the board of the society - as he did recently on reaching his 70th birthday.

Instead, liquidity levels at Irish Nationwide may be under pressure following the recent downgrade from Fitch ratings agency, which painted the building society as more vulnerable than its peers due to the "uncertain outlook" in the commercial and residential property markets.

According to leading analysts, the rating cut means Irish Nationwide will have to pay more for wholesale funding, potentially weakening its strong profit margins.

Cheaper credit lines are available from the Central Bank, but the building society's comparatively small residential mortgage book means that even this funding source is limited.

Under current legislation, European Central Bank loans must be securitised by residential mortgages, which at the end of 2006 accounted for 25 per cent of Irish Nationwide's loan book.

While most banks are battling lower liquidity levels in the wake of the US subprime debacle, analysts point out the cut in Fitch's main credit rating from A to A- , which is six points below the top AAA level.

This leaves the building society at a greater disadvantage than its higher-ranking competitors when it comes to accessing wholesale funding.

And it may now be an additional factor in Irish Nationwide's lengthy sales process. Sebastian Orsi, a banking analyst with Merrion Stockbrokers, describes the society as a "different proposition" to what it was a year ago.

He says potential buyers will "factor in the higher funding costs and the downturn in the commercial property market".

But he insists it is "not possible" to give an accurate valuation of the company.

"What you can say is that Irish banks in general have lost around 45 per cent of their value and Irish Nationwide would be no different".

In August 2006, some

analysts predicted the society's price tag could be as high as €2 billion, although, up until the credit crunch, market

consensus valued it at closer to €1.5 billion.

Orsi also points out that "higher funding costs lead to lower interest margins" - the net difference between interest earned and interest paid - a key measure of a bank's profitability.

Scott Rankin, an analyst with Davy stockbrokers, agrees with this reading, although he cautions it is difficult to quantify how much further Irish Nationwide's wholesale funding rates will rise.

When announcing the rating downgrade last month, Fitch noted that Irish Nationwide "has access to a large and historically stable retail deposit base that funds a substantial proportion of the loan book".

And a credit analyst at the agency, Alison Leveridge, stressed the society was "extremely profitable, well capitalised and boasted a low cost/income ratio".

So why the downgrade? One key concern, according to Leveridge, is the large proportion of development financing on the company's loan book.

"The problem here is that you're waiting for developers to engage with the planning process, and there really isn't any income coming off the land if they don't get it to the next stage."

She also singles out the "rapid rise" in the society's loan to value rates (LTV), which have surged above 95 per cent in recent times

One senior banking source says such high LTVs mean Irish Nationwide is likely to be under water on some deals, as values on development land have plummeted up to 30 per cent in some areas.

However, he notes that it is not alone in this scenario with "many institutions in the same boat".

While industry observers, in general, still expect the Irish residential and commercial property markets to achieve a soft landing, another credit rating analyst at Fitch, Matthew Taylor, recently told the Guardian that "a wider range of rating actions on Irish banks" may be required "in the case of a more severe contraction in economic growth".

Irish Nationwide's increasingly jittery membership must be hoping that the market is now bottoming out and that any further rating action will head in the opposite direction.