Thursday, 23 February 2012

Killing the goose that lays the golden egg is a global sport

As the flood of UK bankers leaving the country for Australia, , those arriving in sunnier climes may be surprised to find that they are no more popular down under than they were in the UK. Whilst the tirade against bankers led by the Coalition Trade Secretary and Chief Bank Basher, Vince Cable, has been continuous over the last three to four years, the challenge to see who can make bankers the most unpopular has been taken up by Australian politicians. For some time this has been led by Treasurer Bob Swan. Just like Vince Cable, he has been a noisey advocate that the banks are "hugely profitable" and "determined to keep that high profitability in place" at the cost of customers and staff. Unlike UK bankers the Australian bankers are fighting back. National Australia Bank chairman Michael Chaney says the bank bashing has gone too far.

"I think it's irresponsible because we are living in a fragile financial world,"  people sitting in any other Western economy who had heard the Treasurer or Joe Hockey (the Shadow Treasurer - the Ed Balls equivalent), for that matter, talking down the banks would have been incredulous. (he clearly hasn't been reading or watching any of the UK media on this topic!) I think they both understand the economic facts but have allowed their political interests to override that. "There is room for a senior politician on either side to take the economic high ground and explain to the general population that you need healthy banks to fund growth."

This point is even more true for the UK which has a higher dependency on Financial Services for the economy than Australia which at least has mining to help drive the economy. On the one hand the UK politicians have been very vocal about criticising the banks for, through irresponsible lending, causing the financial crisis, on the other hand they have been equally vocal about the banks not lending enough to stimulate the economy. No wonder bankers are leaving the industry and/or country.

In Australia the average return on equity for the big four banks is around 16 per cent. The Commonwealth Bank, which announced its first-half results on Wednesday, has the highest ROE at 19.2 per cent. UK banks would die to be able to get that return. Bob Diamond, CEO of Barclays has set a target of 13%  by 2013, but has acknowledged that that date might need to go back. RBS is targetting 12%, but is also suggesting that this might take longer to get to than anticipated. HSBC has set a target of 12-15% by 2013 but has also acknowledged that this date may slip. Lloyds Banking Group is targeting 'high to mid teens'. The challenge for the UK banks to get to their ROE targets has been made even greater by the recommendations of the Independent Commision on Banking requiring more capital to be held and the ring-fencing of customer facing operations adding to this burden.

Westpac chief executive Gail Kelly says politicians should be championing the profitability of the local banking sector, which enabled Australia to emerge virtually unscathed from the global financial crisis.
"It is unfortunate that bank bashing has tended to be so prevalent in Australia," Kelly says. "If you look around the world, it's very evident how critical it is to have strong banks and how much that leads to strong economies. "We actually want to make sure that we have a decent return on equity and above the cost of capital, which is clearly not the case in other jurisdictions around the world." Her comment referring to the ROE figures for US, European and UK banks.

"There is no real consensus on what is an appropriate level of profitability. If you assume the risk-adjusted cost of capital for the big four banks is about 12 per cent, then ROEs of between 15 and 19 per cent "might be a bit high but are not extortionate", University of Melbourne finance professor Kevin Davis says.

Whilst Australian banks are more profitable than the UK ones, Indonesia, China, Russia and India have even more profitable banks.

As Bob Diamond, the CEO of Barclays said in January 2011, the 'period of remorse and apology for banks needs to be over'. Whilst this is understandable coming from the bankers the question is isn't it time for the politicians both in the UK and Australia to put aside their partisan  populist views and get behind the banks and start promoting their critical role in driving the economies forward?

Friday, 17 February 2012

Who said branch banking was dead?

Handelsbanken, the UK arm of the Swedish banking group Svennska Handelsbanken, continues to defy the critics who have said that the branch-based banking model is dead, is going from strength to strength. Now with 119 branches in the UK (compared to the 75 branches Virgin Money has acquired with the purchase of Northern Rock and the single digit number of branches the much publicised Metro Bank has), has reported a 66% increase in operating profits. It was already the most profitable of the UK retail banks (in terms of margin not £s). For all the constant griping about banks making too much profits it interesting to see that customers don't object to these banks being profitable. Indeed the most profitable of the retail banks also seem to have the highest customer satisfaction (see ). Handelsbanken has for some time been leading the UK banks with the highest customer satisfaction.

The bank has achieved this not by investing heavily in new technology, call centres and mobile applications or by marketing, but by going back to the basics and executing them brilliantly. Their greatest advocates are their customers. Their model is to deliver banking the way it used to be. Their branch managers are expected to live in the neighbourhood where the branch is. They are expected to be active and to be seen in the community. The managers personally approve 95% of loans.They have a 'church spire' principle for lending. Simplistically if where you live or where your business operates from can been seen from the top of the local church spire then they will consider lending to you, if not they won't. Of course this principle is not rigidly applied.

The Handelsbanken model, whilst virtually unique in the UK, is not the only bank to operate along these lines. Bendigo Bank in Australia has operated like this from its beginning (and has the highest level of customer satisfaction amongst the Australian banks) and many of the community banks in the US such as Umpqua Bank reflect these same  values.

There is still plenty of scope for these types of banks to challenge the dominant banks in their markets, attract more similarly minded customers and profitably grow, but the challenge for them is how to attract younger customers and the future business entrepreneurs. Since for these digital natives the idea of visiting a branch is not intuitive, the question has to be how can they create a similar sense of community in a digital world? Increasingly the tools and acceptance of digital communities is making this possible, so whoever gets this right has the potential to be both very profitable and have high levels of customer advocacy.

In the meantime, once again, the prophets of doom who continue to forecast the death of the branch, are being proven wrong.

Wednesday, 8 February 2012

Third time lucky for NBNK?

Having lost out to Co-operative Financial Services for the Lloyds Banking Group disposal and to Virgin Money for Northern Rock, word is that NBNK, the Lord Levene and Gary Hoffman led vehicle to acquire a bank, is looking to acquire the UK assets of National Australia Bank. NAB announced earlier this week a three month strategic review of their UK assets, namely Clydesdale Bank and Yorkshire Bank. 'Strategic reviews' normally result in one of two outcomes either the disposal/closure of the assets or severe cost-cutting. Only in 2011 Cameron Clyne, Group CEO of NAB, had been saying that he wouldn't be disposing of the UK assets with valuations being so low. Bank valuations have hardly improved since then, but with no short term prospect of the UK economy improving or bank valuations strengthening it appears that his views may have changed on that, which could be good news for NBNK.

Certainly for NBNK, NAB UK is a far lower risk, lower cost option than the acquiring of the 632 branches along with the Intelligent Finance, C&G and TSB brands that Lloyds Banking Group's Verde consists of. After all Yorkshire Bank and Clydesdale bank are going concerns, there would be no short-term need to manage the migration of customers away from their chosen bank or to migrate onto new systems. Yorkshire Bank and Clydesdale could rightly be seen as already challengers in some areas of banking particularly in SME and small corporate banking. Under the leadership of the former CEO, Lynne Peacock, they made significant investments in the South-East and were seen as innovative with their airline lounge style branches for SMEs and their business speed dating. However both Clydesdale Bank and Yorkshire Bank have for many, many years been starved of investment. particularly in technology. Their online offering is far behind any of the competition and developing an exciting digital presence will be critical in the battle for customers. Their parent in Australia is, in many ways, a leader in digital for retail banking, particularly in their use of Twitter, youtube and facebook.

One of the early challenges for NBNK, should they be successful in acquiring Yorkshire and Clydesdale, will be what to do with the branding. The loyalty of customers to the Yorkshire brand cannot be underestimated. There are Yorkshiremen and Yorkshire women who have stuck by their bank (and that's the way they see it) through thick and thin even though the pricing and the service may not have been the best and anyone who messes with a Yorkshireman should be wary of the consequences.

If NBNK isn't able to acquire the NAB UK assets then where else do they go? It's not obvious that there are many other opportunities with sufficient scale out there. The question for investors in NBNK is whether it should be three or out?

Tuesday, 7 February 2012

Why entering UK retail banking is not so easy as Tesco discovers

Despite the Independent Commission on Banking being keen to see new competition entering the UK Retail Banking Market, it's not proving to be that easy for new entrants. Tesco, one of the most dynamic and operationally excellent businesses in the UK,  in its second announcement of a delay in its launching of the two key products to be a bank, a current current and a mortgage, is finding it harder than expected to get their new bank launched. The intention was to launch mortgages in 2011 followed by current accounts - the two products essential for a bank. The 2011 mortgage launch date was to have formally moved from 2011 to "early 2012", but now is "in the next two months" The current account launch which was mooted to orginally have been launched in 2011 is now being announced as 2013 with the introduction of a redirection service as a result of the ICB recommendations influencing the date. Tesco, along with the other high street banks has until September 2013 to introduce this service.

Why is it so difficult to launch a new UK retail bank?

It starts with the regulatory process. It has taken over two and a half years for Tesco to get a banking licence and its mortgage scheme is still not approved. Getting staff FSA approved is proving to be increasingly challenging, even when the person is a well-established banker with a proven track record. It is not unusual for it to take over seven months to get approval. During that time the person is not allowed to even operate in an 'acting' capacity even if they are simply swapping roles in an existing bank. This is hampering existing banks and is even more challenging for new entrants.

Secondly the systems required to operate a UK bank are proving more challenging than Tesco could have predicted. Tesco Personal Finance had its systems operated by Royal Bank of Scotland but for Tesco Bank has migrated them off the RBS platform and onto their own Fiserv-based platform.  This proved to be extremely challenging for Tesco with many IT problems. In comparison to the planned split of the Lloyds Banking Group 632 branches, Intelligent Finance and C&G, this is relatively simple. However it has not proved to be, with a number of Tesco customers not being able to access the full details of their savings accounts for a number of days.

Santander has also found the migration of accounts from Royal Bank of Scotland has taken far longer than expected and certainly more troublesome. Santander is a bank that has grown by many acquisitions and with all that experience and its single IT platform, Partenon, should be the bank to find this easiest.

As Co-operative Financial Services completes its negotiations for the acquisition the Lloyds Banking Group Verde package, it would should take heed of the experiences of both Tesco and Santander when it considers how long and at what cost it will take to migrate its acquisition onto a less straightforward platform than Santander's.

It is not a disimilar situation to that which Virgin Money is now facing given that it has had the keys for Northern Rock since January 2012.

The delay in the launch of the  Tesco mortgage products is being put down to systems challenges and further testing. "We have taken the decision to slow down the introduction of new products until we have settled in the new bank team, processes and systems, having encountered some technical issues during the summer, which resulted in some customers being unable to access online accounts for a short period," says the retailer.

As Benny Higgins, Chief Executive of the Bank, says "Getting it absolutely right at launch is more important than rushing it. This is for the very long term".

This is an entirely sensible move on the part of Tesco. Whilst is may be very tempting to launch on the date promised, it is better to get the launch right than to launch and have customer impacting issues. With an increasing focus in banking on competing based on the customer experience - making the right first impression is important and Tesco gets this.

However the delays and the adverse publicity has had an impact on new customers coming to Tesco Bank with the increase in new accounts being measured in small digit percentages.

It is worth noting that despite Tesco being seen as a 'new entrant' with a different attitude towards banking they have had to increase their provision for misselling Payment Protection Insurance to £92m - a drop in the ocean in comparision to Lloyds Banking Group's billions, but it still shows how difficult it is to keep a clean sheet in banking.

Despite Tesco being an organisation that has a reputation for operational excellence they have had, and continue to have, their challenges. Profits for their financial services business were down 65.9% for the first half of the year (the increase in the provision for PPI being a major contributor to this).

With Tesco and Santander encountering difficulties building their challenger banks, there is a clear warning out for the Co-operative, Virgin Money (and NBNK and JC Flowers, both of whom are still looking to create a challenger in the UK market) - Caveat emptor - buyer beware! Be careful what you wish for.