LOWER interest rates for borrowers and higher payments to savers meant a fall in profits at the EBS building society last year.

Pre-tax profits fell by 20 per cent to £18.3 million because the society gave £5.7 million back to its owners through lower mortgage rates and higher returns on savings.

EBS pre-tax profits fell from £23 million in 1995. If the benefits package for borrowing and saving members had not been introduced during the year, pre-tax profits would have increased to £24 million, according to chief executive Mr Pat O'Reilly.

He described 1996 as "a super year for EBS".

Emphasising its commitment to its mutual status (savers and borrowers own the society), EBS announced a reduction in mortgage rates and an increase in deposit rates in February 1996 at a cost to the society of £4.8 million in profits foregone.

In September 1996, it deferred until the end of the year a general market rise in mortgage rates of 0.25 of a percentage point at a cost to the society of £0.9 million.

In December, EBS said it would continue to put off raising its mortgage rates until April 1997, when it would assess the situation in the light of market rates.

"We would like to continue to defer. People know our intentions but we will have to wait and see," Mr O'Reilly said.

In 1996 gross lending rose by 40 per cent. EBS advanced £388 million before repayments and £232.5 million in net new loans after repayments - a rise of 18 per cent, bringing the loan book to £1.53 billion.

Home loans accounted for £175 million of the net new loans, with the balance made up of commercial loans. It expects its 1996 market share to be about 10.5 per cent, up marginally on the 1995 outcome.

"If we were aiming for market share we would have put the £5.7 million into front end discounts. We are very satisfied with 18 per cent growth in new lending, Mr O'Reilly said. By year-end, total assets had increased by 17 per cent to £2.1 billion.

The society took in £273 million in new funds in 1996, a 50 per cent increase. Some £157 million came from savers and £116 million from the banks.

Operating income fell by 5 per cent to £49 million. Interest earnings were £1.1 million lower, while interest paid out increased by £1.4 million. Income would have risen by 6 per cent without the benefits package, according to Mr O'Reilly.

Interest earned on mortgages would have been £3.5 million higher without the benefit package while interest paid to savers would have been £2.2 million less Mr O'Reilly explained.

Net income from fees and commissions on insurance sales was flat at £2.5 million.

Net interest margins - profits from core lending and funding activities - slipped from 3 per cent to 2.49 percent.

Costs were 6.7 per cent higher at £30.1 million. With the growth in lending driving up assets, the society's cost-to-asset ratio fell from 1.78 per cent to 1.57 per cent.

But its cost-income ratio increased from 55.9 per cent to 63 per cent reflecting the impact of the benefits package on income.

After a £0.6 million provision for bad debts - up from £0.4 million - and tax at an effective rate of 36.6 per cent, EBS reported a 19 per cent fall in its surplus for the year to £11.6 million.