Wednesday, 12 January 2011

Why 2011 will not be the year of new entrants in banking

There is no doubt that there are plenty of opportunities for new entrants into the retail banking. There are quite a number of 'starter packs' of various sizes including:
  • Northern Rock (the "good" bank)
  • The Lloyds Banking Group 600 branches (as dictated by the EU due to the state funding)
  • The UK operations of Bank of Ireland
  • National Australia's UK operations (Yorkshire Bank and Clydesdale Bank)
  • Building Society consolidation (due to the constraints on wholesale funding)
In addition there are opportunities for those who will start with a complete blank sheet in the bricks and mortar world such as Virgin.

There are even players with money who have said that they want to enter or expand their presence in Retail Banking, such as NBNK (led by the former CEO of Northern Rock and Barclaycatd, Gary Hoffman), JC Flowers based on their relationship with Kent Reliance Building Society, Advent, who have a large fund and have made no secret of their desire to enter the financial services market and Tesco, but this will not be the year of new entrants.

The reason is time - the amount of time that it takes to get all the approvals, build the organisation and get ready to start business. Tesco is expected to launch its new bank this summer, but it will have taken them 2.5 years since they originally announced their intention to end their partnership with Royal Bank of Scotland and go on their own. This isn't a case of Tesco being slow indeed they have demonstrated on many occasions and for many different products lines (pharmacy, mobile phones, DVD rental) that what Tesco excels at is executio. The reality is that is the time to takes to get through the regulatory processes, to get infrastructure and applications in place, to define business processes, establish the organisation and hire and train staff.

Virgin recently announced that they will open four or five branches, but that it will be twelve to eighteen months before they are open for business, and the likelihood is that it will be nearer to eighteen than twelve months.

The second reason that 2011 will not be year of new entrants is due to the uncertainty caused by the Independent Commission on Banking which will not produce its final report until September this year. Whilst we may be given an indication of their likely conclusions as early as April, even when the report back in September their recommendations will not be binding on the Coalition, so there will clearly be a delay whilst the government decides what they will actually implement. This makes it very difficult to put a valuation on the potential assets for acquisition, so it is questionable as to whether any serious contender will  be able to make a bid this year.

So whilst we may get some announcements of intent to enter the UK retail banking market in 2011, with the exception of Tesco, we will see little or no change in the banks on our high streets for some time to come.

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