Wednesday, 22 December 2010

Spotlight falls on Big 4 role in banking crisis

With the annoucement that the New York State Attorney-General, Andrew Cuomo, could press charges against Ernst & Young relating to an accounting practice which allowed the Lehman Brothers to hide tens of billions of dollars in debts from investors, the spotlight is beginning to fall on the role of auditors in the banking crisis. With the levels of fees that the Big 4 receive for auditing the banks measured in hundreds of millions, yet again questions have to be asked as to whether they are commercially conflicted from calling out where they find questionable practices when the loss of a contract to audit can have such a large financial impact on a firm.

An argument put forward by some from the Big 4 is that many of the reasons for the financial crisis were too complex to have been spotted by the auditors. One of the reasons for this may be that, whilst the Big 4 charge millions to conducts audits, they flood the audits with new graduates and junior staff, thus maximising their profits. Carrying out audits, which is openly acknowledged as not the most interesting work that the Big 4 do, is seen very much as part of the rites of passage, part of the apprenticeship that is required to be done by those wishing to progress through the firm. Questions need to be asked as to whether the right calibre of staff are put onto audits and whether the culture of Big 4 prevents those on audits from asking the difficult questions.

A critical part of the Attorney-General's case will be that both middle ranking managers at Lehman Brothers and Ernst & Young flagged up concerns about the use of 'Repo 105'  to Ernst & Young, but that this was not raised with the Lehman Brothers board. This raises a serious question about the culture within the Big 4, where Partners are treated as demi-gods who's judgements cannot be questioned, certainly if the employee wishes to remain in the firm or on a career upward trajectory. In the case of Matt Lee, the Lehman's employee who raised the issue, within weeks he was laid off.

The issue of the auditors raising issues is not limited to Lehman Brothers, but also the other banks that failed during the crisis such as Countrywide, Northern Rock and Anglo Irish Bank.

With all the focus on bankers and their bonuses, it should not be forgotten that many of the partners of the Big 4 are paid significantly higher than the majority of the investment bankers and rather than their pay being reduced as a result of the financial crisis, which they could potentially have helped prevent, all the Big 4 have announced significant growth in their profits and their partners' take home pay.

History can teach us many lessons and the partners of the Big 4 should very conscious of the impact of Enron on the once mighty Andersen and its partners.

Tuesday, 21 December 2010

UK in closing down sale!

It's official the UK is up for sale, but better hurry up everything must go!

As passengers sit out another day at our Spanish owned airports (what do they know about snow?), reading their Australian-owned newspapers or watching Australian-owned Sky TV, they will be pleased to know that the salt that is needed to clear the runways and get the motorways open has just been sold to the Indians. Lloyds Banking Group's private equity arm has announced that is has sold British Salt, producer of 50% of the UK's salt, to the Indian firm Tata. The more bad winters we have the more profits will flow overseas, and who said that there wasn't an upside to global warming - just not for the UK.

For those looking for another bargain there's not a lot left, Britain is prepared to sell anything, even if it is nailed down. Already gone: Airports (Spanish and Australian), newspapers (Russian and Australian), channel high speed rail link (German), gas and electricity (French and Russian), cars (Indian), football clubs (Russian, American and many more), banks (Spanish).

Rumours are that the Russians have put a bid in for the Royal Family, as unfortunately they shot their lot a while back!

Call my bluff over moving Head Offices from London?

The news that JP Morgan has announced that it will acquire the Lehman Brothers offices in Canary Wharf as it's new European Headquarters will be good news for both Vince Cable and George Osborne as it demonstrates that, despite the draconian regulations and restrictions on bonus payments, bankers are not fleeing London.

Mike Geoghan, out-going HSBC Chief Executive, may talk about HSBC's review every three years of the location of its Head Office (next coming up in early 2011), but just how realistic is it that HSBC might up sticks and relocate back to Hong Kong?

When HSBC was last headquartered there Hong Kong was a very different place. It was still under British control and very much managed as a British outpost. HSBC was also significantly smaller and less international. If HSBC were now to relocate back to Hong Kong, the reality would be that it wouldn't be regulated by Hong Kong, but rather Beijing and that is not something that either the shareholders or the employees would want.

It's not even clear that the Hong Kong regulator would even want HSBC if they wanted to come. To regulate a bank of the size and complexity of HSBC would require a far larger and more sophisiticated regulator than exists today, requiring the hiring of regulators from across the globe, in the short term at least and a very significant investment on the part of Hong Kong.

So the reality is that as the top executives of the banks sit down today with George Osborne and Vince Cable to discuss bank bonuses, for all the bluster and implied threats of moving their headquarters out of the UK, the politicians will be confident that HSBC, Barclays and Standard Chartered are all here to stay, at least for the time being.

Friday, 17 December 2010

Banking lessons to be learnt from down under

Mike Smith, CEO of ANZ Bank, has made a impassioned plea for an end to bank bashing. His speech applies equally to the UK, how important the banks are to the UK economy and what the banks need to do to respond to the current financial crisis.

"Allowing a populist backlash against our most successful businesses - whether they be miners, telcos or banks - and allowing a long-standing commitment to open markets and globalisation to be undermined - will inevitably lead to a less prosperous future for all of us - shareholders and the community alike.
"In this regard there has been a great deal of debate in Australia in recent months about the four major banks.
"One of the key issues is competition in the banking sector.
"We believe this is an important discussion because a strong banking system has been, and continues to be, critical to Australia's economic success and therefore our national prosperity."
Mr Smith said the irony is that in Australia we are currently having an inquiry into the banks which are safe and successful while in the US and UK there are inquiries into why banks failed, or had to be bailed out by their governments.
"Lower credit growth and the higher costs of doing business mean we'll need to drive productivity and innovation even harder to stay ahead of the game," he told shareholders.
"We need to change - we need to streamline our structures and do things in a new and different way.
"Our customers want simpler processes. They want convenience, they want security, and they want more innovation from us - and this also helps drive medium and long-term value for shareholders."

Plain talking common sense.

Thursday, 16 December 2010

Is Asia the new marmite?

RBSG has announced that it will be withdrawing from retail and commercial banking in China, but still sees China as an important market for investement and corporate banking. So anxious is it to exit China that it is not even asking DBS Bank of Singapore for any money, but are simply giving the customers and a number of staff to the bank.

RBSG was one of the first banks in recent history to enter into China, through a joint venture with Bank of China to launch a credit card. At the time it was seen as yet another example of Fred Goodwin making a smart move to turn RBSG into a global player. He appeared not to be able to make a wrong move. Partnering with Bank of China allowed the Chinese to gain the credit card expertise whilst it was a low risk way of RBSG getting to understand China and the financial services market. Since the disastrous acquisition of ABN-AMRO the global aims of RBSG have been put firmly into reverse, with this one of a number of disposals by RBSG in Asia.
The RBSG announcement comes hot on the heels of Aviva announcing the sale of Asian assets so that they can focus on growing Europe.

Whilst RBSG, Aviva and Santander do not see Asia as part of their consumer strategic direction, the FS industry is showing signs of polarising on Asia. Just like marmite FS companies seem to either like it or hate it. HSBC, Standard Chartered and Prudential can't seem to get enough of it.

Meanwhile in another component of the BRIC countries, Santander has announced its withdrawal from Russia with the disposal of its Consumer Finance business there. As the Russian banks get stronger local academic opinion is that there is less of a role for foreign banks to play. It will be interesting to see whether the likes of Barclays and Citibank follow suit.

Monday, 13 December 2010

Australian Banking Reform more tinkering than structural reform

After much discussion and posturing in the media, the banking reforms to increase competition in the Australian banking market were announced on Sunday December 12th. After much hype around fundamental restructuring and the building of a fifth Pillar, the reality has been little more than tinkering around the edges and is likely to have little impact on competition in the market, with even the danger of hurting the smaller players. Philosophically the reforms announced are more about helping the smaller players rather than restricting or hampering the Four Pillars. Fundamentally there are really two changes: measures to improve the access to wholesale funding and secondly measures to help consumers switch mortgages. Interestingly the measures to increase liquidity in the market including increased government funding of securitisation and the ability to issue covered bonds, both of which in their extreme form brought about the financial crisis in the first place.

There is one reform that gives the regulator more teeth and that is the ability to prosecute in the case of evidence of price signalling by the Four Pillars i.e. acting as a cartel, however how easy it will be to prove is highly questionable.

As reviews of regulation to improve competition in banking markets carry on across the globe, what are the lessons that those conducting those reviews can take from the Australian reforms?

Firstly for all the macho talk about breaking up the big banks, when the practicalities kick-in it is all a lot more complicated, expensive and difficult to do than say. Secondly, the focus should be more on helping the smaller players compete than punishing, and being seen to punish, the market leaders. Finally that market concentration does not mean a lack of competition, particularly when there is a similar level of scale amongst the big competitors.

Friday, 10 December 2010

Why the FSA RBSG report is like the Iraq Inquiry

Since the FSA cleared RBSG executives of any wrong doing last week, following an eighteen month inquiry led by PwC, there has been mounting pressure from (surprisingly) the RBSG executives, politicians, the public and the media for the report to be published. It now turns out, according to Lord Turner, Chairman of the FSA, that having spent a considerable amount of tax payers money on the investigation by PwC there is no report. This brings back memories of the 'dossier' that resulted in the war in Iraq - another document that can't be published.

Lord Turner went onto say "I feel uncomfortable with the present position and I recognise and respect the public desire to…have the history of why taxpayers ended up having to rescue RBS". He also pointed out that the eighteen months investigation was never intended to produce a report that met that requirement.

Just as with the Iraq Inquiry, once again we see the politicians deciding what the outcome should be and then setting the terms of reference to ensure only what they want comes out. They treat us all as if we are idiots and won't spot that these investigations and inquiries are rigged from the start.

Should there be a thorough review of what brought about the UK taxpayer having to bail out RBSG, so that we can ensure that it never happens again? Of course there should and, if a proper scope was investigated, it wouldn't only be the bankers who the finger would be pointed at, so it'll never happen. And even if it should by some miracle happen, who could possibly carry out the investigation when so many people and bodies have their fingerprints all over what went on from regulators, auditors to politicians. And there are so many with a vested interest in burying the conclusions.

Thursday, 9 December 2010

Tesco Bank chief Benny Higgins accuses UK's biggest lenders

At yesterday's Treasury Select Committee hearing on competition when Tesco Bank CEO, Benny Higgins, criticised the banks for sharing credit data between themselves (through the credit agencies - isn't that just a prudent way of ensuring lending is made to the right people ),  http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8187591/Tesco-Bank-chief-Benny-Higgins-accuses-UKs-biggest-lenders.html  he failed to mention all the data that Tesco has as a result of the Club Card, which needless to say they won't be sharing with the banks. The data that Tesco has is far more detailed than anything the credit agencies hold and something that is absolutely the envy of the banks.

He also failed to mention that he was for many years one of those bankers, firstly  for a long time under Sir Fred Goodwin at RBS  for many years and secondly for a short period under Andy Hornby for HBOS.

Is this a case of poacher turned gamekeeper or more poacher turned poacher?

Wednesday, 8 December 2010

NAB systems down again!

To misquote Lady Bracknell 'To lose one's systems once may be regarded as a misfortune. To lose your systems twice looks like carelessness!". National Australia's systems went down again earlier today (their afternoon) taking out electronic payments systems including ATM and POS and internet banking. This time, however they were able to restore the systems after only an hour. According to National Australia the two incidents were unrelated, however it sounds that a much deeper dive into what is going on in IT is required than the review by their auditors KPMG.

Bank of Ireland follows NAB in systems crash

You might think it was catching, but following National Australia's payments systems crash (which has still to be completely resolved two weeks after ocurring - see "These things happen" says NAB CEO after payments system crashes), Bank of Ireland's systems crashed yesterday preventing customer access to their cash accounts. ATMs and Point of Sales systems were impacted both in Ireland and in Post Offices across the UK. It's reported that the problem has largely been resolved, but that the amount of cash that can be withdrawn from ATMs might be restricted. Bank of Ireland said the problem was due to an "unforeseen technical issue".

We can all take some relief that it wasn't due to a "foreseen technical issue". Of course in comparison to National Australia, Bank of Ireland was able to recover their systems far more quickly and with far less impact on their customers. However should there have been any impact on customers? The criticality of ATM and POS systems and the impact on customers of any failure is such that these systems should be designed and built with a high level of redundancy and the ability to failover instantly without any impact on customers. This clearly wasn't the case for Bank of Ireland.

The Bank of Ireland systems are currently outsourced to Hewlett Packard. Perhaps it is telling that only last month Bank of Ireland announced that that contract was not being renewed and was going to be transferred to IBM.

Tuesday, 7 December 2010

How to enter the UK banking market (not for the faint-hearted)

Eric Daniels, the CEO of Lloyds Banking Group has said that the UK Banking sector is competitive, but just how easy it is to enter the market?

For a start each of your key team need to be personally vetted and approved by the FSA. This is no rubber-stamping exercise as has been seen by the number of people recently rejected by them. Secondly there is the need to get a banking licence.

Applying for a UK banking license is a complex process. You will need to complete a comprehensive set of application forms and provide the Financial Services Authority with a full set of supporting documents such as your business plan, risk management policy statements, compliance manuals and procedures and other information. As a new entrant that means that you will have had to have defined not only your operating model but in detail how you will perform all processes. Certainly not a short process, and that is before you apply for the licence.
“You will need to show the regulator that you have a clear and workable business plan. You will need to evaluate your capital requirements and to demonstrate that sufficient capital is in place.

Getting the FSA Approval and the Banking licence are only the first of the many hurdles for new competitors getting into the market. You either have to build the infrastructure for a bank from scratch (branches, technology, call centres, processing centres, hire the people, etc) or buy them (e.g. Northern Rock, Lloyds Banking Group's branches) with all the complications of separation from the mother ship. Combine these two together and you can see why it can take several years and a lot of capital before a new competitor can enter the market. Then the real fun starts, trying to persuade customers to transfer their banking relationship to the new bank whilst still making a profit.

You really, really need to want to enter the UK banking market to put yourself through all that pain and expense.

No wonder the incumbents aren't losing sleep about new entrants when the barriers are so high.

Standard Life has a Victor Kiam moment

Standard Life has announced today that it is to buy Focus Solutions, the financial services products and consultancy business. Victor Kiam, for those old enough to remember, used to go on television saying that he so liked his Ronson Shaver that he bought the company. It seems that Standard Life likes the Focus Solutions products so much that it has done the same.

This is a strange move at a time when many Financial Services organisations are looking at selling their captives, focussing on what they do and know best; Standard Life is bucking the trend.

They have tried diversifying their proposition before when they launched Standard Life Bank, focussing on savings accounts and mortgages. An adventure that ended in tears with the sale of the business to Barclays. Whilst at least the bank was in Financial Services, as many organisations have found, it takes a different set of skills and a different culture to run banking and insurance - timeframes, distribution channels and attitudes to risk are quite different, however they are lot more similar than running a Life Assurance company and running a software products business.

How much will having Focus Solutions as part of Standard Life distract executive attention away from the issues facing the Life & Pensions industry at a time where there is so much change, so much appetite for consolidation within the UK industry and so much focus on expanding in Asia for many players. With major changes such as Solvency II, the Retail Distribution Review and Pensions 2012 do the Standard Life executive have the bandwidth to grow a software business?

From a Focus Solutions customer perspective, how keen will the other 7 out of 10 insurance companies in the UK who use Focus Solutions products be on the company being bought by Standard Life? It will be difficult for Focus Solutions to argue that it is providing independent advice and solutions to the insurance industry when it is owned by one of insurance companies. Even with the best Chinese walls being built, there will always be at the back of the mind the ownership of Focus Solutions.

For Banking customers of Focus Solutions there must be a concern of where future R&D will be focussed given the new ownership.

Hopefully many of these questions will be answered over the next few days and weeks.

Friday, 3 December 2010

There's no such thing as free banking

John Varley, the outgoing CEO of Barclays, yesterday at the Independent Commission on Banking public meeting said that 'It is possible that free-if-in-credit banking is a structure that has outlived its time.' He described the concept as 'idiosyncratic by the standards of the world' and said it was worth examining.

This follows up the remarks made by the FSA Chairman Lord Turner that free banking damaged competition in financial services.

Whilst bankers may refer to 'free banking' and many consumers may believe that they have 'free' banking when in credit the reality is that banking is anything but free. All of us pay for our banking, but the charge is far from transparent. The fact that the banks either don't pay us for our credit balances or may pay a paltry 0.2%, but then lend out our balances to customers at much higher percentages is just one of the many ways that we pay for our banking services even when we are in credit.

Should the Independent Commission on Banking recommend the abolition of free-banking and the government implement their recommendation, then how would they make that work? Would they pass a law that organisations would be compelled to charge for cash withdrawals at an atm, for cashing a cheque, for paying a bill? A system where you pay for every transaction altready exists in Australia and has for some time, and to address Lord Turner's assertion that this will encourage more competition, there is an even higher concentration of market share amongst the Four Pillars (ANZ, Westpac, National Australia and Commonwealth Bank) than there is in the UK. Has the absence of free banking made that market anymore competitive than the UK - absolutely not. Indeed the Australians have their own commission on banking currently running that will report on its recommendations to create more competition in the Australian financial services sector later this month.

As a panacea to create more competition in banking the end of 'free' banking is not the answer. The only winners from the abolition of 'free' banking would be the banks. They are already actively encouraging more and more customers to pay fees for their 'value-added' accounts, as the banks look to boost the proportion of their income that comes from fees rather than interest, particularly when interest rates are so low.

Should the government persist in driving down that route, interfering with the free market by legislating the end of free banking (which is completely impractical), then consumers should be lobbying to ensure that the fees introduced are more than compensated for by the increase in interest that is paid by the banks for credit balances and the significant reduction in overdraft fees.

Thursday, 2 December 2010

Was PwC able to objectively evaluate RBSG for FSA?

The Financial Services Authority today announced that they were closing their supervisory investigation into the Royal Bank of Scotland Group, as one of the UK banks that required partial taxpayer bailout support. The FSA conducted this detailed investigation with the support of PWC. The question is whether PwC were able to conduct this work objectively and without conflict given that they are one of the largest providers of consulting services to RBSG?

In this case there is no conflict with the audit as Deloitte are the bank's auditors, but how critical could PwC be  of RBSG when many of the senior management at the time of the ABN Amro acquistion and the capital raisings, a primary focus of the investigation, are still in place and will be key decision makers and approvers of consultancy spend?

Not that anyone is suggesting that PwC was anything but professional in performing their work with the FSA, but there is the question of perception.

As the Big 4 (PwC, KPMG, Deloitte and E&Y) continue to acquire and consolidate consultancy firms and the Competition Commission looks at the consultancy market, questions must be raised as to where the truly independent advice comes from?

Government has increased the loss of investment banking jobs

As Barclays Capital announces that they will be laying off hundreds of staff, the government needs to take responsibility for this loss of jobs. By consistently calling for a reduction in bonuses the government has forced the banks to increase the base salaries of investment bankers in order to still be able to attract talented staff, particularly from banks not subject to the UK governments regulations. By having a higher base cost of having the staff, when volumes of business drop, even for a short period, executives of investment banks, in order to meet shareholder demands for profits, lay off staff.

Prior to the government intervention on bonuses, investment bankers were paid a lower base with more of their total package based on performance. This meant that retaining staff during a lull in business was a more acceptable option because the salary bill was lower than it is today.

Being employed in the investment banking industry has always been risky, because of both the cyclical nature of the global economy and the volatility of markets, investment bankers have got used to expecting periods of time when they are either not earning a great deal or are unemployed. This is one of the reasons why their total compensation is higher than many other professions - there is higher risk and there is a need to save during the good times in anticipation of the inevitable bad times.

A basic lack of both an understanding and a lack of a desire to understand the cyclical nature of employment in investment banking has led to regulation being rushed in that is now resulting in both an increase in unemployment and the emigration of investment bankers. Ultimately that means a lot less income for the government in terms of both direct and indirect taxation, which, in turn, will lead to a lower rate of growth in the economy and more bankers being laid off. There is a greater need now than ever before for that over-used expression 'joined up thinking'.

Wednesday, 1 December 2010

Portuguese and Spanish at the helm of Lloyds Banking Group

Four hundred years after the Spanish Armada failed to invade Britain, the Spanish are now firmly in control of two of the largest banks in the UK. The announcement of the first two appointments since Antonio Horto-Osorio was hired as CEO of Lloyds Banking Group, both from Santander is significant for both banks.

The announcement of  the departure of the feisty Carol Seargent, Chief Risk Officer, from Lloyds Banking Group made a few weeks ago had caused some head scratching, but now all has become clear with the appointment of Juan Colombas, Head of Risk at Santander. Since the banking crisis, the role of CRO has become increasingly important and Santander was one of the global banks least impacted by and best able to take advantage of the turmoil in the markets.

Bringing in the CFO of Santander UK, Antonio Lorenzo as Director of Wealth and International will bring   global experience to this role. As suggested in the entry 'Santander boss Horta-Osório to be new Lloyds chief executive' on November 3rd, the appointment of both Horta-Osorio and now Lorenzo, hopefully will result in a more outward looking strategy for Lloyds Banking Group and may even lead to a return to Lloyds Bank's Latin American history.

As Horta-Osorio brings in members of his team that he has worked with for some time, in response Ana Botin is bringing in members of her team from Banesto into Santander UK. Ana Botin officially starts in her new role today, very appropriately the first day of Advent, when across the world people all wait expectantly  for what is to come. 2011 looks to be an exciting year for banking here in the UK and across the world.

Update:  As a result of the defection of Horta-Osorio, Colombas and Lorenzo to Lloyds Banking Group, Santander has announced that the planned flotation of Santander UK has had to been postponed until the second half of 2011. The reason given is that this will give the City a chance to get to know the new team of Spaniards running Santander in thr UK and improve the chances of the flotation successfully getting away. In the meantime Santander has to hope that the economic situation in Spain does not deteriorate too much as it waits longer for the capital from the flotation.

Tuesday, 30 November 2010

"These things happen" says NAB CEO after payments system crashes

Four million customers of National Australia Bank in Australia were left without access to their money for over a week after a corrupt file took down the payments system. The incident arose on Wednesday night  resulting in payments, ATM and POS transactions grinding to a halt. In some cases multiple transaction entries occurred  and in others they did not happen at all. This meant that the likes of mortgage payments and utility bills weren't paid and in many cases employees did not receive their salaries. Cameron Clyne, CEO of NAB said "Unfortunately in any large organisation these things happen from time to time". But is he right?

Whilst he might be right that unexplained incidents do occur with IT systems, what is not expected is for it to take over six days to be able to fix the problem. As NAB starts to investigate the cause of the problem questions need to be asked as how the payments system was designed with a single point of failure, whether there was any backout/recovery in the system and when and whether robust disaster recovery testing had last been carried out.

Many banks for too long have underinvested in their legacy systems, bolted on changes without any reference to the integrity of the overall design and crossed their fingers and hoped that the systems don't fail. Ironically NAB has recently kicked of a AUS$1bn technology refresh.

The impact for customers of not being able to access their money apart from the monetary implications is one of high levels of emotional stress and a loss of faith in the banking system. Queues were seen to be formed outside banks as customers tried to get their money. Fortunately there wasn't a run on the bank and the other banks stepped up to assist by waving charges for non-payment and other such actions. But the damage to the banking system was done and it will take some time to repair.

The total impact for NAB, both financial and non-financial will only be known over time.

The processing of payments is the one basic task that banks are expected to perform, flawlessly time after time. Indeed that is the principle reason for banks existing for many consumers and corporations.

As banks around the globe heave a sigh of relief that this hasn't happened to them, this should prompt many bank CEOs and CIOs to perform an audit on the vulnerability and the recoverability of their payment systems and their ability to respond to such a major incident. Scenario planning and simulation should all play a part in this.

No bank can afford to rest on its laurels; there are lessons to be learnt for all  from this incident in Australia.

Monday, 29 November 2010

Ever Eastward for HSBC

Last week HSBC announced what was the first of what is expected to be a number of changes to the executive management of the Group following the announcement of Stuart Gulliver as the new CEO. As further evidence of HSBC's focus on the Far East another senior executive will be moving to Hong Kong from London. A new role is being created, Head of world-wide Retail Banking and Wealth Management and Paul Thurston, currently based in the UK will be its first incumbent. This comes at a time when the wealth of Asia's millionaires overtakes that of Europe's, so the move is rational for a bank with such a strong presence both in wealth management and the Far East.

Increasingly Europe is becoming less and less significant to HSBC, with net profits from Europe representing less that 25%. The UK representing only a portion of this. With the move of more senior executives to Hong Kong, increasing taxation and regulation in the UK, the review of HSBC's Headquarters location in 2011 may be far from a formality.

Would the last person out of HSBC's head office in Canary Wharf, please switch the lights off.

Friday, 26 November 2010

Citi plans to wake the sleeping parrot

The FT reports today that Citi is planning to resuscitate its retail presence in Europe by opening flagship stores in the UK, France and Germany. Just as with the Norwegian Blue in the Monty Python sketch, Citi's retail presence in Europe is well beyond resuscitation, a new birth is required.

Citi has never been clear what it wants to be in the retail market in Europe. It appears to have grown in Europe without any clear joined-up pan-European stategy. Now there is an opportunity for it to re-think what its proposition is to European banking customers and to leverage far more effectively its global, cross-border brand and its high net worth positioning for Europe. Hopefully a slimmer and re-energised Citi will be able to do this and to truly compete in the retail market against the likes of HSBC, Santander and Barclays, for the business of the global, mobile, modern Europeans. There is no doubt that there is a need for more competition for these customers, but it is going to take a lot more than opening 'Apple-style' branches to be a contender.

Thursday, 25 November 2010

Australia lead 1-0 and it's not in the Ashes (yet!)

When Robert Peston of the BBC said that the appointment of Ana Botin as the CEO of Santander in the UK was a 'cultural' revolution, It's a Financial World pointed out that he was wrong (see the posting on  November 3rd 'Women in Banking').

Across the world Australia appears to be leading the UK, once again,  in ensuring that women have a place at the table in banking. Gail Kelly has been running Westpac, one of the 'four pillars' since 2008, having previously run St George's Bank, one of the challenger banks until it was acquired by Commonwealth Bank of Australia (CBA). Now each of the Australian banks has come out with a target for the percentage of women who should be in senior management positions. CBA has targeted increase the number of women in senior management positions to 35 percent by 2013, while Westpac Banking Corporation is targeting 40 percent by 2014, Australia and New Zealand Banking Group aims to have 40 percent of women in management by the end of next year, while NAB says 28 percent of its management positions are currently filled by women.

In the UK we saw last week the launch of the 30% Club who's aim to see women having 30% of the seats at board tables.

The fact is that there is clear evidence that increasingly women are in senior positions within banks across the globe. However this is not really the point. What is most important is that there is a diversity of views on the senior management teams and that those views can be expressed freely and openly. There is little doubt that if a number of the banks had had  a more open, less alpha-male culture on their executive committees and boards that many of the mistakes that brought about the global financial crisis could have been avoided.

So whilst the aspiration of the Australian banks by setting targets is to be praised, these targets should be broadened beyond simply women and to ensuring that a broader set of perspectives, whether it be based on race, experience or gender are actively brought onto the senior management teams and boards of banks across the globe and that discussion and disagreement is actively encouraged rather than shut down by a culture of fear. By doing this a repeat of the global banking crisis will be far more effectively avoided than by simply relying on draconian regulation.

Tuesday, 23 November 2010

The Independent Commission on Banking requires a time machine

Claire Spottiswoode, a member of the UK government-initiated Independent Commission on Banking has suggested that a recommendation of the Commission may be "reversing what happened on that day a few months back when Lloyds took over another bank,” referring to HBOS. The comments were made at a meeting in Leeds held by the Commission to seek public input into their investigation.  The Commission is due to publish its non-binding recommendations in September 2011. Undoubtedly the Government will need some time to consider the Commission's recommendations. By which point, it is highly likely that the Lloyds TSB and HBOS integration will have completed, resulting in one set of IT, one common back office and a rationalised management structure. Without inventing a time machine (and don't forget that DeLorean was also UK Government funded) reversing the integration at that stage would not only be prohibitively expensive, but quite possibly impossible. Given that the bank is 41% owned by the tax-payers, it is highly questionable whether this would be a good use of money, as ultimately the tax-payers and the consumers would be paying for it.

It is probable that the suggestion was not intended to be taken literally. Lloyds Banking Group has already been instructed by the EU, as a consequence of taking state funding following the banking crisis, to dispose of around 600 branches. These will be made up of the Lloyds TSB branches in Scotland, Cheltenham & Gloucester branches and then additional existing branches to make up the remaining market share that has to be disposed of.

Ms Spottiswoode's assertion is based on the presumption that there too much power lies with a small number of large institutions. Should there be a question of the Commission recommending a more significant disposal of Lloyds Banking Group branches, then any interested potential purchaser of the 600 branches would most likely want to factor this into the timing of their making an offer. Ironically rather than increasing competition in the UK retail banking market this could slow it down.

The Independent Commission on Banking has a very challenging task - inventing a time machine might just be easier.

Monday, 22 November 2010

Irish Banks to shrink

Brian Cowen, the Irish Primer Minister declared that Ireland's banks will become "significantly smaller" as a result of the financial bail-out by the IMF and the EU. This is as was predicted in this blog ("Time to break up Bank of Ireland?") on Monday 15th November. Mr Lenihan went on to say that the Irish banks would have to sell all non-essential foreign assets. Whether the Bank of Ireland's UK operations can be regarded as "essential assets" needs to be clarified, but whilst they are seen as an alternative source of income and an area of long term growth for the Bank, it is unlikely that there will be any other outcome than they will be put on the block.

Fortunately for any potential purchaser, the Bank of Ireland has already wrapped up these assets and put a bow on them by, at the beginning of November, putting them into a separate subsidiary, registered in the UK and regulated by the FSA.

The Bank of Ireland UK assets consist of a banking licence, guaranteed distribution through the 11,500 Post Office outlets and an established, trusted brand (The Post Office) which isn't seen as one of the banks that brought about the financial crisis. For any would-be new entrant to the UK banking sector this could represent a more attractive option than acquiring either Northern Rock or the 600+ branches that Lloyds Banking Group must dispose of, both of which would be more complex to acquire and establish, not least of all because of the challenges of taking on a large branch network with all the people and technology issues associated with that.

It shouldn't be understimated how difficult and the level of risk associated with taking on a large branch network would be for a new entrant. As has been recently seen by the acquisiton of the English-based Royal Bank of Scotland branches by Santander, the customers don't always like the idea of being sold to another bank without their say-so.

For a new entrant acquiring the Bank of Ireland UK operations the acquisition could, certainly in the short term, be almost invisible to the customers. They would still be able to go into the same branches (post offices) that they have always done, with the same branding over the door and the same staff serving them. This would give the acquirer the time to decide what to do with the back office processing and to be able to evolve the service over time and in a controlled way.

As the OFT said in its recent report, the challenge for any new entrant is to establish a branch network, to create trust in the new brand and to persuade customers to transfer their banking relations to the new bank. With an acquisition of the Bank of Ireland's UK Operations each of these challenges becomes easier than for the alternatives.

The bailout of Ireland and the Irish banks could just be the catalyst to create new competition in the UK banking market.

Wednesday, 17 November 2010

Burger King Banking - is it a Whopper?

Vernon W. Hill II, the founder of Metro Bank, the first new high street bank in the UK for over 100 years, likens growing Metro Bank to growing a Burger King franchise. He should know as he owns a large Burger King franchise in the US. He also successfully grew Commerce Bank in the United States to 500 'stores'. What he means by the similarity of growing a Burger King franchise is that every 'store' looks identical, operates identically, has the same level of service and operates as a retail outlet. In Metro's case some of the gimmicks are giving away free pens (Barclays has been quietly doing that for some time in their branches), free dog biscuits and cash counting machines built to look like one arm bandits.

None of this is particularly new either in the US, the UK or the rest of the world. We have seen over the last decade or so banks attempting to become more like retail outlets whether it is the Abbey experiment with branches co-located with Costa Coffee outlets, which lent heavily on the experience of Washington Mutual with its co-located branches with Starbucks or the Australian branches with their offer of waxing your board while you are doing your banking. We've also seen banks recruiting senior executives from the retail sector to drive that retailing mindset into the branches. As tax payers no one should be allowed to forget the impact of having a retailer running Halifax Bank of Scotland had on that particular bank.

The point is that on the surface it may seem that a bank branch is just like any other retailer, but it only at the surface that that analogy works. When you go into a burger king to go to buy a standard product that is entirely disposable, highly commoditised and which you own for only a very short time. For a product such as this a bright, open plan store with little or no privacy is entirely appropriate. However opening a current account or a loan or a mortgage is nothing like a burger. Buying these types of products is a  long term, for many a life time, acquisition, intensely private (sharing how much you earn or are worth continues to be one of societies taboos that simply isn't going away) and are not quick purchases. So when you sit down in an open plan office, where the people on the street outside walking past can see the screen that the banker is operating as he types in your salary or looks at your overdraft, and the person at the desk next to you is ear-wigging on your conversation don't forget to ask whether your value added account comes with fries!

Monday, 15 November 2010

It's a financial world: Time to break up Bank of Ireland?

It's a financial world: Time to break up Bank of Ireland?: "Given the dire state of the Irish economy and the freefall in the share price of Bank of Ireland, now would be a ideal time for a player who..."

Time to break up Bank of Ireland?

Given the dire state of the Irish economy and the freefall in the share price of Bank of Ireland, now would be a ideal time for a player who wants to enter the UK banking market to make an offer for Bank of Ireland's UK banking operations.

What they would get is an established network of 11,500 outlets, a brand (The Post Office) that is trusted and, most importantly, isn't seen as a 'bank' and also isn't seen as one of the organisations that got the country into the current mess. Buying the UK operations has recently become easier, not just because of the problems that the Bank of Ireland faces in its domestic market, but because since November 1st the UK operations have become a separate subsidiary with its own board and regulated by the FSA. By creating this entity separation becomes easier.

As the recent OFT report on barriers to entry stated two key factors inhibiting customers switching to new entrants is brand loyalty and customers' preference for a branch network. By the acquisition of the Bank of Ireland UK operations these two barriers can be swiftly overcome.

Selling their UK operations is not something that Bank of Ireland would want to do. The UK is seen as a growth market and where future profits will come from, whereas any growth in their domestic market share would be severely frowned upon. However should the Irish economy deteriorate further, as seems to be likely, and Bank of Ireland require further funding from the government, then the disposal of the UK operations may no longer be optional. As has been seen with both Royal Bank of Scotland and Lloyds Banking Group, there is a price to pay for governmment funding in terms of forced disposals. For an entrant with access to capital this could make for a very sweet deal.

Wednesday, 10 November 2010

Money! Money! Money! The Swedish bankers in Britain

When you think of the Swedish - most people probably first think about Abba, but once they've got those irritatingly happy and persistent tunes out of their head, the picture of the Swedish is of a quiet, unassuming, sensible race with a blood thirsty history as the Vikings of invading Britain, raping and pillaging. Well the Vikings have invaded again, though this time their approach has been with a much lower profile. Since 1982 Handelsbank, one of Sweden's leading banks with 700 branches in 22 countries, has been quietly opening branches all over the UK. It may surprise you, as it did me, that there are now over 80 branches across the country. Not only that but in 2009, Handelsbanken was voted the top bank for customer satisfaction and loyalty in the UK. Why have Handelsbanken been so successful in keeping their customers happy? The answer is simple - they have turned back the clock and made their bank managers the bank i.e. their bank managers are empowered to make decisions there and then and don't have to refer decisions back to a Head Office, thus they can truly provide a great service to their customers.

Handelsbanken continue to open branches across the UK achieving their goals of both being more profitable than their competitors  as well as having happier customers and lower costs.

In days of old the Vikings would sneak up and attack at night surprising their enemy; the traditional UK banks you have been warned!

Tuesday, 9 November 2010

Don't bank on the Post Office

At a time when the Government is saying that it is encouraging greater competition in the UK banking market, wanting there to be more choice for customers, the decision not to allow the Post Office to launch its own bank seems to go against all they have been saying. The official reason is that it would be 'time consuming and too capital expensive'. With a network of 11,500 branches across the country the Post Office would be ideally placed to take on the big banks, with an established and trusted brand and ease of access, two of the key critiera for access to the banking sector, according to the OFT report on the barriers to entry, published last week. The timing of this decision seems premature when the Independent Commission on Banking has only recently started work and is not expected to report it's conclusions until next October.

What the Government is doing is enabling more customers of the high street banks to access their current accounts in branches of the Post Office. What they don't say is that by doing this they will encourage the high street banks to close more of their branches, particularly those in more remote or poorer areas. How is this really helping those on low incomes or the unbanked to get access to Financial Services?

Friday, 5 November 2010

Switching SME banking relationships is easy - the OFT report says so!

Yesterday the OFT published its report on the barriers to entry and exit in Retail Banking. For those who haven't read the report in detail, some interesting responses from SMEs surveyed that little media attention has focussed on:

76% of SMEs who had switched thought it was very easy or easy to switch suupliers
4% of SMEs who had switched thought it was difficult
49% of SMEs  who had switched said it cost less than £100 and a further 21% didn't know how much it cost
49.6% of SMEs use more than one bank for their businesses
Of those who put their business with only one bank 78% had either not even thought about it or thought it was too much hassle to have a relationship with more than one bank
57% of SMEs are not disatissfied with the service they receive from their banks.

What the banks should take from this is that there is no room for complacency, SMEs can and will switch and there is a long way to go to improve satisfaction with the service provided.

Thursday, 4 November 2010

The competition in UK Retail Banking is coming ... but when?

Gary Hoffman, the CEO of Northern Rock, today announced that he is leaving the bank to join NBNK Investments, the new banking start up. NBNK in their turn have promised not to bid for Northern Rock for at least twelve months. However NBNK have been vocal about wanting to bid for the Lloyds Banking branches that the EU has dictated that they must dispose of as the cost of taking state funding to stabilise themselves after the acquisition of HBOS.


Meanwhile JC Flowers has been buying building societies starting with Kent Reliance with the aim of creating a cluster to take on the big banks. They too have, in the past, expressed an interest in acquiring Northern Rock when the government decides to dispose of it.


At the same time Blackrock has been pulling together plans to create one of the UK's biggest credit card companies by buying both Egg and SAV Credit, owner of the Marbles credit card.

And then of course there is Tesco, which has made no secret of the fact that it is building a full service banking operation.

The list goes on with the likes of Bank of Ireland creating a separate UK subsidiary regulated by the FSA, National Australia strengthening its UK offering, Virgin buying a small bank to get a banking licence and Metro Bank rolling out its offering one branch at a time.

There certainly appear to be more players looking to enter the UK retail banking market than at any other time in recent history. This on a day where the Office of Fair Trading publishes its report on barriers to entry in the retail banking industry and basically says the reason that there isn't enough competition in the UK market is fundamentally down to the consumer and the small business owner being too apathetic to change their bank. So it was all our fault all along - silly us!

As the Independent Commission on Banking takes its year to look at competition, concentration and stability in the UK banking market, the big banks can all point to the new entrants who say that they're going to shake up the market and ask what the problem is - this is a market that is vibrant with competition. The only problem is that, so far, it is all talk and we're no closer to being told when any of these players will actuallly open an account for a customer.

Wednesday, 3 November 2010

Women in Banking

So Ana Botin is tipped to become the CEO of Santander in the UK. Robert Peston blogs that this is a cultural revolution and that there aren't women in senior positions in the banks. The reality is that there are fantastic people in senior positions in banks who happen to be women. Is Robert living in the dark ages where we have to draw attention to the gender of the person? Just some of the examples of fantastic bankers are: Deanna Oppenheimer who runs Barclays Retail bank across the UK and Western Europe. Deanna when she was at Washington Mutual virtually designed how retail banking is seen across the globe with the modern open plan branch design.Her COO also happens to be a woman as well. If you move over to Lloyds Banking Group the head of the Retail Bank (and seen as a potential candidate for the CEO role until that was filled today) is the very talented Helen Weir. Running the Lloyds Bank and Bank of Scotland branch networks is Joy Griffiths, a  banker who has made her mark in Australasia and America before bringing her talents to the UK, and running the integration of the two retail banks is Helen Rose. I could go on, but Robert having women in powerful positions in banks is not news and neither is it worthy of mention.

If anything the story about Ana Botin is how long she has been groomed by her father, the Chairman of Santander, for the top job. The legend goes that as a young child she would sneak into the board room at Santander, hide behind the curtains and listen to the board meetings. Ana is a very bright, intelligent and articulate banker - there is no doubt that she has what it takes to be the CEO of Santander UK.

Santander boss Horta-Osório to be new Lloyds chief executive

A great and imaginative move on the part of Lloyds Banking Group bringing in Antonio Horta-Osorio  in as the new CEO of the Group. Bringing with him the experience of integrating several UK banks, negotiating with the UK government and most importantly a global perspective. In many ways Lloyds Banking Group and RBSG have tried to emulate Santander, where Horta-Osorio comes from, with their manufacturing model to retail banking, so to bring one of the architects of the Santander strategy is a great coup. Hopefully his coming on board will inject a more outward looking strategy and maybe we will see a return of Lloyds to Latin America, once a key strategic plank of the old Lloyds Bank.

Aviva to exit Asia?

Does Andrew Moss know something that all the other Financial Services organisations don't? With his announcement yesterday that they would look at selling their Asian businesses just as everyone else is placing their bets on Asia being their future - this is a very contrarian move. Only time will tell whether this is a wise move, but the smart money is on that this isn't.

BBVA takes a stake in Garanti Bank

What a smart move by BBVA - what a shame that our UK banks aren't being as strategic in recognising the growth potential in Turkey. Turkey has a vibrant growing economy, with an educated, young population. As one of the few countries that is self-sufficient, it has enormous untapped potential. Other European and US banks have recognised that potential - Citibank, ING and Dexia amongst them, but the UK banks (with the exception of HSBC) continue to shy away from Latin America and the north african countries. The danger is that the UK, as it has in so many other ways will be left behind while the rest of the world surges ahead.

Tuesday, 2 November 2010

Today Lloyds Banking Group was the first of the UK banks to give a third quarter indicator of results. Unlike the US, UK banks don't need to report financial numbers each quarter, they only have to indicate direction of travel. Not really surprisingly all the indications are that Lloyds Banking Group will record a profit for the year. There will be a similar story told by each of the UK banks over the next couple of weeks. The banks are back, which should actually be good news for all of us; after all we as UK tax payers and pension contributors hold sizeable shares in each of the banks and when they gain we gain. In a time when it is easy to make the banks the scapegoat for all our current woes, it's not popular to praise the leaders of the banks for the way that they have run their banks since the crisis - it's time to recognise that these good results have come from a lot of hard work from a lot of ordinary people who work in our banks.