Showing posts with label Cooperative bank. Show all posts
Showing posts with label Cooperative bank. Show all posts

Wednesday, 6 August 2014

Creating competition in retail banking

With the recommendation by the UK CMA (Competition and Markets Authority) to conduct a review of competitiveness in the current account banking market, what are some of the areas that they may consider to increase competitiveness?

Breaking up the banks. This is the Labour party’s big idea - creating a set of competitor banks by splitting the big banks. The primary focus for this would be the Royal Bank of Scotland and Lloyds Banking Group. However this isn’t a new idea and is already being tested with the creation of TSB from Lloyds Banking Group and Williams & Glyn’s from RBS. However already there are lessons to be learnt from this process.

While there was initial interest from a number of players the list of serious bidders rapidly shortened when the complexity, the capital required and the price being sought became clear. The initial two successful bidders the Co-op (Lloyds) and Santander (RBS) after lengthy negotiations and detailed planning withdrew their bids.

Separating the bank’s technology whether cloning (TSB) or migrating to a new platform is proving to be enormously complex and very expensive.

The payback period is very long and without the subsidy and support of the selling bank would be even longer. TSB for instance does not expect to break even for many years and that is despite being helped by Lloyds lending the new bank a book of loans.

While breaking up the banks will mean that there are more places to have a current account there is no guarantee that this will ensure better deals for customers, particularly given that the easiest option for the broken up banks is to be clones of the original banks just simply without the scale advantages. With little to differentiate them having more players in the market doesn’t result in real consumer benefit.

Creating a payments utility separate from the big banks. One of the often heard complaints from new entrants is that the big banks have an advantage because they own the payments infrastructure and the cost for new entrants to use that infrastructure is a barrier to entry. One option would be to create a separate payments utility not owned by the banks. However that does not mean that it will necessarily be cheaper for new entrants. For a start there is the cost of acquiring and separating the infrastructure from that of the banks that currently own it which would need to be paid by customers of the utility. There is also the question of how to charge for the use of this utility. The charge would need to reflect the significant cost of running, maintaining and investing in modernising the infrastructure – it is not simply the cost of using the infrastructure because otherwise what is the incentive for whoever ends up owning the infrastructure to invest in it to make it not only continually available but also suitable for new innovations as they come along? Commercial reality dictates that for banks with high transaction volumes that cost per transaction should be lower.

Portable bank account numbers. Many of the challenger banks are supportive of the concept of portable bank account numbers. They look at the mobile phone industry and see the way that customers can take their phone numbers with them. However before recommending this change the CMA needs to research just how big an inhibitor to switching bank accounts for customers is the change of account number. Given the Seven Day Switching Service where the banks guarantee no interruption to direct debits and standing orders and given the limited numbers of times customers actually have to know their account number in order to transact, would portable bank account numbers really open the floodgates of customers switching bank account numbers?

Ending ‘free when in credit’ banking. In the UK customers have got used to so-called ‘free banking’ where as long as a customer remains in credit, whilst they get little or nothing for the balance that they retain, they don’t pay charges. A number of the challenger banks have complained that this gives the incumbent banks an advantage as it is difficult (but not impossible) to compete on price and because it gives banks offering current accounts a distinct advantage over those who don’t in terms of the low cost of all those balances when it comes to lending. It will take a brave politician to move to compel the end of free banking. Of course to attain transparency then the cost of each transaction e.g. cost of an ATM withdrawal, the cost of paying in a cheque, the cost of a direct debit, etc, would need to be made clear to customers and, the challengers would argue, that that would enable customers to choose between banks. However looking at a market where this is the way banking is conducted, Australia, then not only is there a greater concentration of current accounts held with the Four Pillars (Nab, Westpac, CBA and ANZ) than with the equivalents in the UK, but Australian banks are amongst the most profitable retail banks in the world. Despite that there are not lots of new entrants fighting to get a slice of the pie. For customers Australia is also one of the most expensive countries to bank. It would appear that ending ‘free banking’ alone would not solve the perceived competition problem.

Set a maximum market share for current accounts. On paper this would appear to be the solution. The big banks could be given a period of time over which they must reduce their share of the market to for instance to no more than 15% of the market each leaving the challenger banks to fight over the remaining 40%. The banks would need to be told the mix of customers they must dispose of, just as Lloyds was instructed for the disposal of TSB. However what does this do for consumer choice? Not all customers were happy to be told that they were moving from Lloyds to TSB without an option. Given that the CMA investigation is about creating competition and making it easier for customers to switch banks this does not appear to be the solution.

Make it even easier for new challengers to enter the market. Measures have already been put in place to reduce the capital required, shorten the process and allow challenger banks time to grow into being a full scale bank. The benefits of this are already being seen with the likes of Atom Bank being announced. It is difficult to see what more could be done in this area.

Make retail banking more profitable to encourage more new entrants. There is little chance of this being one of the recommendations of the CMA. The reality is that with increased regulation, increased scrutiny and rising costs for compliance retail banking is becoming less and less attractive a sector for investors. As JC Flowers have recently remarked with Returns on Equity going from double to single digits there are more attractive sectors to look at investing in.

Is the CMA looking to solve a problem that customers don’t see as a priority? With the advent of Seven Day Switching the number of customers changing banks has risen – over one million customers have chosen to do that. The biggest beneficiaries have been TSB, Santander and Nationwide Building Society. There more than a handful of challenger banks out there – Tesco, Marks & Spencer, Metro Bank, Co-op Bank, Handelsbanken, Aldermore and others with current accounts on the way – amongst them Atom Bank and Virgin Money. Despite that the market share of the large high street banks hasn’t changed significantly. The question is why aren’t customers changing banks? Is it simply because they see banking as a utility, that each of the banks are pretty much the same, that for most customers (unlike bankers, politicians, financial journalists and consumer champions) banking doesn’t enter their consciousness unless they have a bad experience. In the grand scheme of things for most customers they have far more important issues to think about than whether they should switch their bank accounts.

Perhaps it is time that the CMA focused on something of more day to day importance to consumers.

Tuesday, 25 March 2014

Should the CIO be on the Executive Board?


The news that the CIO of Co-operative Group (which has a minority holding in Co-operative Bank), Andy Haywood, is to move off the Executive Board but to remain Group CIO brings a further spotlight onto what is the role of the CIO going forward and, whilst not directly related to the demotion of Mr Haywood, specifically what is the future role of CIOs in banks.

The reporting lines of CIOs have evolved with the increasing use of technology in organisations. Even the title of the person responsible for IT has evolved alongside the technology.

When computers were first introduced into banks their sole purpose was to act as a giant calculator and move what was held in physical ledgers onto computers so that the bank’s financial position could be calculated. The person responsible for making that happen would have had one of a few titles including EDP (Electronic Data Processing), MIS (Management Information Systems) or simply Computer Manager. The role would have reported to the Finance Director or Chief Accountant as that was the department that was primarily serviced by computers. Indeed today in many organisations today IT continues to report to the CFO.

As automation started impacting the back office operations of the banks and IT started being used outside of Finance, the Head of IT or CIO may have found the reporting line moving to the Chief Operating Officer. For many banks today that continues to be the case.

However with the rise of digital, IT has increasingly permeated beyond the back office and accounts departments and an increasingly large proportion of IT expenditure is being consumed by Marketing.

Banks in particular, where fundamentally the vast majority of their commercial, money-making operations are conducted electronically and not in the physical world, IT is increasingly seen as the lifeblood of a successful business. You only have to observe how little a bank can actually do when its IT systems crash and customers cannot access their bank accounts or their card transactions are not processed to see how important IT is to the operation of a bank.

There have been some interesting experiments in terms of what the right organisation structure for IT should be.

For instance at Barclays when Shayghan Kheradipir was Chief Operating and Technology Officer, he had a model where the COO and CIO of each business unit jointly reported to the CEO of that unit. (See CIO/COO joined at the hip). This meant that IT had a voice at the table for the key strategic decisions for that business unit rather than merely being represented by the COO.  With Mr Kheradipir leaving Barclays to be the CEO of Juniper Networks, it will be tempting for Barclays to revert to the more traditional model.

Commonwealth Bank of Australia has gone further than Barclays did by having the CIO reporting directly to the CEO. It is interesting to note that subsequent to that organisational change Commonwealth Bank has spent significantly more as a proportion of overall costs than other banks on refreshing its IT but as a consequence has one of the most advanced IT architectures and platforms of any retail bank of size globally. It is now being able to exploit that new platform to launch new products and services far faster than its competitors.

However with IT increasingly being outsourced, (whether it by the traditional route of selling IT assets to an outsourcer and buying back services or through the use of the cloud), the demands of digital and increasingly Business Intelligence and data analytics, there is a bigger question as to whether there is a role for the traditional CIO at the Executive table? If it isn’t the traditional CIO then who should be providing the strategic input of the role that IT can do to both lead and serve the bank? The skills are far more aligned with a business savvy enterprise architect who has no vested interest in building an internal organisation but is more interested in providing a pragmatic solution, wherever it is sourced from, who knows how to form strategic alliances, both within the bank and outside and who is driven by the desire to use technology to deliver the best value to both internal and external customers.

That doesn’t appear to be what the latest announcement from the Co-op regarding the role of the CIO is saying, indeed the organisational change sounds like a regressive step. But then the Co-op has far bigger problems to address than how to more effectively exploit IT.

Sunday, 1 September 2013

Another blow to Government ambitions for SME lending as Nationwide postpones launch to 2016

The announcement that Nationwide Building Society is postponing its push into SME banking until 2016 is a blow for the UK coalition government, particularly coming on the back of disappointing SME lending figures this summer. The Nationwide suspension comes despite the new governor of the Bank of England, Mark Carney, announcing that the largest eight banks and building societies (which includes Nationwide) will be allowed to hold less capital once above the 7% level to encourage more lending to the SME segment.

This builds on the bad news earlier in the year for SME lending that Santander was withdrawing from the purchase of the RBSG branches. These branches have been selected specifically for their SME focus. The uncertainty as to who, if anyone, will replace Santander in taking on that business is a further blow. For while the Chancellor has talked about new entrants coming into the UK banking sector and Vince Cable, the Trade Secretary, has pushed for the banks to increase their lending to businesses and even talking about setting up a government funded bank for business, competition in lending to the SME sector has decreased rather than increased. The decision of the Co-op to stop any new lending to corporate sector has been effectively the withdrawal of another player in the market.

But should anyone feel surprised that this is the case? As one of his parting gifts the former Governor of the Bank of England, Lord King of Lothbury, pushed for banks to hold far higher levels of capital than they did prior to the financial crisis. The newly formed PRA then went on to enforce this. With the Nationwide, somewhat surprisingly given the risk averse nature of its book, being told to hold significantly more capital than it has been used to and with a growing residential and buy to let market, both of which require far less capital to be held than for SME banking and represent a far less risky way to make money, it is no real surprise to see that the Nationwide decided there were better places to use its capital at this time.

Of course this is not the whole picture. Nationwide has been for some time been going through the painful process of replacing its core banking platforms. Like Commonwealth Bank of Australia which has declared victory on its implementation of the same system two years late and with a budget that doubled to AUD1.2bn, Nationwide is finding carrying out a full heart, lungs and liver transplant of its systems is not plain sailing. It may well have been that Nationwide has not only delayed the entry into SME banking for financial reasons, but also because the new systems are not ready.

Whilst overall competition in SME banking is reduced there are one or two new entrants that are making their mark, albeit on a relatively small scale. The largest of these is Handelsbanken with in excess of 150 branches and a high level of customer satisfaction despite being very profitable. There is also Aldermore which, whilst keeping a low profile is making  notable progress.  The owners of Aldermore are members of one of the syndicates bidding for the RBSG 316 branches, so the Aldermore approach to banking may get the opportunity to scale up.

The Government may be satisfied that the UK has a safer banking environment but the price that is being paid for the additional regulation, the higher levels of capital and increased interference is that there is not only less competition in SME banking but less lending going to small businesses to fuel the growth of the economy.

Monday, 27 May 2013

Why the Co-op is right to stop new commercial lending




Commercial lending has been a significant contributor to the downfall of a number of financial services organisations. This was the primary reason that HBoS failed and subsequently took Lloyds Banking Group down with it. It was also the principle cause of the failure of Bradford & Bingley who made a major play into the buy-to-let market. Alliance & Leicester kept out of that market until the temptation of high margins and growth became too great to resist and paid the ultimate price by, like Bradford & Bingley, having to be 'rescued' by Santander. Britannia Building Society, which the Co-op acquired, aggressively entered the commercial lending market prior to its acquistion. Indeed it is the size and the problems within the Britannia Building Society commercial lending book that has fundamentally caused the huge capital gap and the down grading of the Co-op's credit rating.

A question has to be why so many safe building societies/mutuals have been tempted into commercial lending and got it so wrong?

There is no doubt that in the good times that commercial lending is highly attractive with guaranteed rents and better margins than for residential lending. The size of deals are far larger than for residential lending and for those who are motivated by numbers signing a deal measured in millions rather than hundreds of thousands is very attractive.

There is also no doubt that market for commercial lending is very much more volatile than for residential lending. Up until 2008 it was always the perceived belief that the only direction for residential housing prices to go was up - the expression 'as safe as houses' was for good reason.

The residential housing market is also more homogenous than commercial lending. Commercial lending has a wide variety of segments such as hotels, offices, retail and industrial. These segments operate in different ways, have different cycles and require specialist knowledge.

Commercial lending requires high amounts of capital, has a far broader range of risks than residential lending and requires having a large diversified portfolio to be successful in the long term.

For residential lending there is a lot of data about the market available, the amount of capital for each individual deal is a lot less, there is a huge amount of historical data, so making fact based decisions is relatively straigh forward.

The same cannot be said for commercial lending. What is critical for success in commercial lending is both internal and external data on what is going on in the market. This includes knowing and understanding what the competitors are doing. If a bank is winning all the commercial lending deals and others are withdrawing from the market then the executive need to be asking why. A question is whether the banks that failed had the data and the analytics in place and, if so, why they didn't respond to it?

For many years banks have wrestled with the decision of whether SME banking sits with the retail bank or the commercial and corporate bank. At least one lesson that should be taken from the financial crisis is that the skills, knowledge and understanding that is required to lend to consumers and the mass market is quite different from those to lend to businesses. To move from retail to commercial lending is not a continuum but to move into a totally different business. It appears that the new CEO of the Co-op gets this and has wisely decided that commercial lending is a step too far. The question outstanding is still whether the Co-op should be in banking at all?

Wednesday, 15 May 2013

Should Co-op exit banking?

As incoming CEO, Euan Sutherland, reviews his options for raising potentially in excess of £1bn extra capital, given the issues he faces, rather than considering selling off his funeral business (a recession proof, profitable business), a logical option would be to look at selling off Co-op Bank.

The problems that Co-op Bank has both with the quality of the debt and the IT sit squarely with the misguided acquistion of Britannia Building Society. It is Britannia's foray into commercial property that has resulted in the downgrading of the Co-op's debt. It is the poorly executed integration of Britannia into the Co-op bank that has cost more, taken longer and has not left the Co-op with a viable banking platform. Both of those facts not only de-railed the Verde deal but should have been enough of a warning to both the Treasury and the FSA (as the regulatory body at that time) not to proceed with the Co-op as the preferred buyer of Verde.

A question that Euan Sutherland needs to answer as part of his strategic review is does it make strategic sense for the Co-op to own a bank? If it does, what will it cost to take what he currently has and turn it into a significant competitor in the market?

Tesco has invested heavily and continues to in Tesco Bank. It is taking more time and costing a lot more than it  was orignally envisaged to re-launch it as a full service retail bank. However its starting position was and is very different from that of the Co-op. For a start Tesco is world class at customer analytics and applying that to its business. With the launch of the Tesco Clubcard and the acquisition of the customer analytics business Dunhumby, Tesco has a wealth of information and insight about its customers which it already leverages and with the launch of current accounts and mortgages will be able to leverage further for its bank. Secondly Philip Clarke, the CEO of Tesco, recognises that digital is the second curve (the first curve being the stores) that Tesco must invest in to win in the market. Having a large estate of stores is not enough anymore to win in Financial Services or Retail. Tesco is investing millions in digital for both marketing and selling. With Tesco Mobile as part of its offering it is also very well positioned to lead in mobile payments and banking.

Although Sainsbury's was the first amongst the UK supermarkets to launch a bank, it allowed Tesco to overtake it. With the announcement by Sainsbury's that they have bought out Lloyds Banking Group's share of Sainsbury's Bank and will be investing £260m over the next 42 months to put in place a new banking platform, the seriousness of Sainsbury's intent to become a significant competitor for financial services is clear. Like Tesco, Sainsbury's will leverage the synergies from their stores and the customer insight they get from the Nectar card. Like the Tesco Clubcard Nectar will be a critical part of it's differentiated offering. Sainsbury's too is investing in digital (though it lags Tesco) and recognise the need to deliver omni-channel propositions i.e. allowing customers to interact with the bank over multiple channels simultaneously. Sainsbury's will in many ways be playing catch up on Tesco, however in comparison to Co-op are still significantly ahead.

Co-op still needs to complete the integration of Britannia Building Society, would need to invest significantly in digital for both the retail and banking offerings to even compete. To  be in a position to leverage the synergies between the bank and the rest of the Co-op Group will require significant investment beyond that required to meet regulatory requirements.

When Euan Sutherland looks at all of this, the capital he will need to inject onto the bank's balance sheet, the  size of the investments he will need to make to even get close to Tesco and Sainsbury's in terms of financial services, the time it will take and the likely returns he will need to consider whether this really is the best place for both his customers and members to place his bet.

However who will be interested in buying and how much they will be willing to pay for Co-op Bank with it's junk status debt given that there are at least two other banks available on the market - the 316 RBSG branches and the 632 Lloyds Banking Group Verde branches? There is no doubt that Euan Sutherland has some tough decisions to make in his first few months.

Wednesday, 24 April 2013

Will Verde be Co-op's ABN Amro?


In April 2007 John Varley, then CEO of Barclays, in an attempt to vault Barclays into the Premier League of investment banking made a bid for ABN Amro. Not to be outdone Sir Fred Goodwin put together a consortium consisting of RBS, Santander and Fortis to put in a counter bid.

Through the spring and summer of 2007 a battle took place to win ABN Amro. It could be said that it stopped being entirely about the business sense of acquiring the bank and more about winning the deal, beating the other CEO. This was a deal that appeared to be personal. The price continued to rise.

Finally in early October John Varley and Barclays conceded defeat and withdrew their offer. Barclays was rewarded with being paid 200m Euros as a break fee by ABN Amro. Even at the time of Barclays' withdrawal analysts were saying that RBS was paying too much. One said that RBS was going to be struck by 'the winner's curse'.

The rest, as they say is history. The capital required, the slow down and eventual crash of the global markets and the complexity of the integration all contributed to the situation RBS finds itself in now.

Looking at the Co-op's pursuit of the  632 Verde branches that Lloyds Banking Group has to sell, there appear to be some parallels with the ABN Amro pursuit. Could it be that the Co-op will also be struck down with 'the winner's curse'?

The pursuit of Verde has not been as long as for ABN Amro but it appears to have been as personal. In July 2012 Peter Marks, the CEO of Co-op, boasted that he has taken the shirt off the back of the  Lloyds Banking Group CEO, Antonio Horta-Osario, as they agreed to a £750m price tag. Given that the expectation had been that Verde would sell for between £1.5-2bn, he may have had a point, though he may have been better keeping his opinion to himself.

However Co-op is also paying a big price in other ways to raise the capital it needs to acquire Verde. With the announcement of the sale of its Life & Pensions and Savings business to Royal London and its instruction of Deutsche Bank to find a buyer for its General Insurance business, the Co-op's existing financial services business is being taken apart in order to raise the capital for Verde. Aviva is rumoured to be interested in acquiring the General Insurance business.These deals are not dependent on the Verde deal going through, so should the deal fail the Co-op will be in a much poorer state.

Similarly RBS had to raise a lot of money in order to pay the price it had agreed for ABN Amro. In RBS's case it went to the market and executed a huge rights issue for which in a class action it is now being sued). This left RBS with a highly weakened balance sheet, which made it unable to absorb the massive change in the market. How would RBSG have fared if they hadn't pursued and won ABN-Amro? They certainly would still have had problems with their exposure to Ireland through Ulster Bank and the investment banking business would still have been hit, but with a stronger balance sheet and without the exposure to the PIIGS (Portugal, Italy, Ireland, Greece, Spain) that ABn Amro brought the size of the bailout required from the UK Government would have been significantly lower. Fred Groodwin would almost certainly be Sir Fred Goodwin and his pension would be intact.

Should the acquisition still go ahead, which is looking less likely, this will not be a simple integration by any stretch of the imagination. The integration of Britannia Building Society has proved to be a major challenge for the Co-op, Verde will far more complex. Again looking back at RBS, Sir Fred Goodwin went into the ABN Amro integration full of confidence that the bank knew how to do integrations, but Natwest was fundamentally a larger version of RBS so it was a homogenous integration, ABN Amro was an integration of something quite different from RBS and the costs of integration ballooned.

One of the worst scenarios for the Co-op is that they sell off the assets they need in order to complete the Verde transaction and then fail to close the purchase. This would leave the Co-op in a weakened position in terms of Financial Services and overall in a poorer strategic position.

Whilst Peter Marks may have got what appears to be a rock bottom price for Verde the Co-op will be tied to Lloyds Banking Group for many years to come since they have agreed to pay for and use the Lloyds Banking Group systems for the Verde branches. It will take hundreds of millions of pounds and  years to move off these systems and onto a modern architected banking system so Co-op and Lloyds Banking Group will be partners for many years to come.  The Co-op may need to be reminded of the expression that revenge is a meal best eaten cold.

In the meantime Santander has withdrawn from the acquisition of the 316 branches that RBS is being forced to sell. Santander is a bank that appears to always make smart deals - Abbey National, Bradford & Bingley, Alliance & Leicester and Antonveneta to name a few. Antonveneta was owned by ABN Amro and was one part of Santander's element of the consortium bid led by RBS. In true Santander style it sold Antonveneta on to Banca Monte dei Paschi di Siena before Santander had even taken possession making a $3.5bn profit in the process. For Peter Marks it would be sensible to contemplate why Santander withdrew from the RBS branch purchase and reflect on how that might apply to the Verde deal.

As the crunch point approaches when Co-op must decide one way or another to complete or walk away from the deal and Peter Marks looks forward to his retirement, it would be good to have one last reflection on the deal and to decide whether he would rather be John Varley, who walked away from a bad deal with his reputation intact, or Fred Goodwin who was struck down by the winner's curse.

Update April 24th 2013.

So Peter Marks made the almost certainly right decision to walk away from the Verde deal. For the Co-op to have been burdened with the debt and enormous risks of the Verde deal would not have been a good leaving present.

However it does bring into question the future of financial services within the Co-op. Having sold the life and savings business to Royal London and with the general insurance business on the blocks a question has to be whether the Co-op should pull out of financial services altogether. The integration of Britannia into Co-op Financial Services has been a major challenge and it has not resulted in a real challenger to the Big 5 banks. The Co-op is at a crossroads and needs to decide whether financial services is really a business it can be successful in.

Monday, 23 July 2012

Is Co-op really a contender with Lloyds' Verde?


Lloyds and the Co-op?


What Co-op is acquiring is the 632 branches that Lloyds has had to sell, with all the Lloyds TSB Bank branches in Scotland, the Cheltenham & Gloucester branches across the UK and the rest made up of other Lloyds TSB branches. They will also get the CEO of Verde, Paul Pester, his team and the management and the staff for those branches. Lloyds Banking Group will provide and manage the systems for the foreseeable future.

What does this mean? Starting with the customers there is no guarantee that the customers for those branches will move to Co-op. Whilst Lloyds Banking Group can't market to those customers to transfer their business back to Lloyds, customers are not obligated to stay and could easily move their accounts to another bank, including Lloyds. Evidence of this was seen when Santander bought the RBS branches that had to be sold. Customers did not like the idea of being sold and many have moved their accounts before the transaction went through. As a consequence the value of the deal to Santander has gone down significantly.

Looking at the leadership and staff of the new bank - it is the old leadership and staff. Many of these people will have been at either Lloyds or TSB for many, many years, so there is no guarantee that they won't continue to deliver banking the way that they always have done. Indeed the systems will enforce the processes and incentives of the existing Lloyds Banking Group. Verde, or TSB as it will be branded, could be just a mini-me Lloyds Bank, without the scale to compete.

Having Verde run on the Lloyds' existing systems for the foreseeable future has two distinct disadvantages for the Co-op.

Firstly, the acquisition benefits of rationalising systems and processes that usually underpin any M&A deal are not going to be realised. Instead the Co-op will end up running their Co-op and Britannia branches using the Co-op systems and processes (assuming the completion of the migration of the Britannia systems onto the Co-op platform) and the TSB branches using the Verde systems and processes. Many of the synergies that the bank would have hoped to realise from their 1000 branches will not be achieved until they can move onto a single platform. Due to the complexity and the cost of the Verde systems the migration has been kicked into the long grass. The Co-op will have all the overheads of having to support three brands in the market, Co-operative, Britannia and now TSB. Not only is there expense in running multiple brands, but significant scope for confusion amongst customers. Rather than having a new 1000 branch contender there will be three brands fighting to compete for customers all with less scale than the Big 5.

Secondly Antonio Horta-Osorio, the CEO of Lloyds Banking Group, recognises that the systems underpinning Lloyds are simply not good enough to compete in today's retail banking market. This is why he is spending hundreds of millions of pounds on the 'Simplification' programme to improve the efficiency and effectiveness of the banking systems to enable them to compete in the mutlichannel, always available, digital world. However those improvements will not be applied to the Verde systems. To use an Olympics analogy it is like your older brother giving you his old Nikes while he is upgrading to the far superior ones. Who would you expect to win in those circumstances?

With the size and scale of Lloyds Banking Group there is far more scope for investment in making the retail bank fit and efficient than there is for the Co-op. Not only that, when the Co-op wants to make upgrades to their TSB systems they will be dependent on Lloyds Banking Group to make those changes for them. Whilst Lloyds can be recognised for its history and experience of  excellence in retail banking it is not well known for its provision of IT services and certainly not as a commercial provider of IT services. The Co-op may find itself held back by the speed and agility of not only its systems but also its IT services provider.

The celebrations of the Co-op creating a contender of scale to compete against the Big 5 banks may be a little premature.

Monday, 16 April 2012

Is NBNK drinking at The Last Chance Saloon?



With the speculation that NBNK are pulling out of the bidding for National Australia Bank's UK banks, Yorkshire and Clydesdale, due to the price being asked being unrealistically high. given is that the level Given that the level of impairments in NAB's UK mortgage book could be as high as 30% and the desire of Cameron Clyne, CEO of NAB, to get a price that the market won't bear, this, if confirmed, would be a wise move on the part of NBNK.

Given the market sentiment towards the banks, particularly with the uncertainty of what will happen in Europe and the faltering UK economy, now is not a good time to sell banking assets. For NAB or any other banking organisation looking to sell out of the UK when there is a focus on building capital reserves taking the write down on UK banking assets would not be seen to be a smart move by investors.

NBNK (New Bank) is an investment vehicle backed by some of the biggest asset managers and led by Lord Levene, former Chairman of Lloyds of London, the insurer not the bank, with the sole objective of buying banking assets. Having lost out to Virgin Money, which bought the Northern Rock 'good' bank, and not being selected as the preferred option for the Lloyds Banking Group sale of 632 branches (Project Verde), the options for NBNK do not look good.

With the negotiations between Co-operative Bank and Lloyds Banking Group for Verde floundering, NBNK last week put in a revised proposal for Verde. The response from Lloyds Banking Group was cool. Whilst they acknowledged the receipt of the letter, they re-emphasised that they are in exclusive talks with the Co-operative Bank.

It is increasingly unlikely that the Co-op negotiations will end successfully with questions over the structure, governance, ability to raise capital and the ability to execute on the deal being raised by the FSA (Financial Services Authority).

If the Co-op is unable to get to an agreed deal will NBNK be re-invited into negotiations? Currently the Lloyds Banking Group stanc is that their fall back position is a floatation of a mini-me version of Lloyds TSB. However this would require investors backing the IPO and there is certainly skepticism amongst the investment community as to whether that would be achievable. If banking assets are seen as generally undesirable at the moment what is going to change for a Lloyds Banking IPO? The concerns about an IPO would not just be limited to the ability to raise the finance, but equally the leadership of the mini-me Lloyds TSB would be scruitinised by the FSA. The current leadership of Verde does not consist of obvious big hitters and would need to go through the FSA approval process, before the deal could get away. For Tesco it took nearly two years to get that approval.

For NBNK, if they are invited back into negotiations then they would need to conduct a very detailed due diligence as the deal execution risks are very high. After all the systems and processes that Lloyds Banking Group are putting into the deal can't be that good, otherwise why is LBG spending more than a billion pounds on the post-merger 'Simplification' programme, much of which is being spent on the technology that they are suggesting that the buyer would be stuck with for not an inconsiderable time?

For NBNK with so few opportunities out there to acquire banking assets, are they now drinking at The Last Chance Saloon? Is it time to call last orders, to close down the fund and gracefully walk away?

Tuesday, 20 March 2012

Will the sale of Verde by Lloyds Banking Group to the Co-op complete and it is good for consumers?



The announcement by Lloyds Banking Group at the end of last year that LBG were in exclusive talks with Co-operative Financial Services (CFS) for the sale of the bundle of  632 branches and brands that is referred to as 'Verde' raised the question of whether this is good for UK banking and consumers. Clearly Gary Hoffman, Chief Executive of NBNK and former CEO of both Northern Rock and Barclaycard, didn't think so. “Lloyds has made the wrong decision. There is no question that the execution risk with the Co-op is much more significant, and over a very short period of time this will be proven". It could be argued that this is just sour grapes, given that Gary Hoffman's NBNK (a vehicle with significant institutional backing set up to buy one or more banks) was also bidding for Verde and didn't make the cut, however Gary Hoffman is one of the most experienced retail bankers in the UK and led Barclaycard to be one of the most successful credit cards businesses in the world, so he does know what he is talking about. With the expiry of the exclusivity agreement and the invitation of NBNK back into discussions, Gary Hoffman may yet prove to be right.

Merging Verde with the Co-operative ticks all the boxes for the ICB (Independent Commission on Banking) in that it will create a competitor with around 7% market share in current accounts and is building on an established player, both recommedations made in the ICB report. However that still doesn't answer the question of whether it will really become an alternative to the Big 5 banks.

Unlike Virgin Money (see http://www.itsafinancialworld.net/2011/12/is-northern-rock-decision-good-for.html ), the existing Co-operative Financial Services is largely undifferentiated from the Big 5 banks. Whilst it makes a lot of its ethical stance it was still caught up in the Payment Protection Insurance (PPI) misselling scandal, writing off £90m, which, in fairness, is a lot less than the major high street banks, but is still significant. CFS is hardly the most customer centric organisation. Until very recently the payment terms on its many charity-branded cards were so tight that unless you opened the credit card statement on the day you received it and made payment within a couple of days it was impossible to avoid charges for late payment. Hardly a customer friendly or ethical way to operate. This has now been addressed.

If you look at the high street presence of the combined CFS and Britannia branches (CFS acquired Britannia Building Society in August 2009), the offering and customer experience is dated and certainly no better than the major high street banks. With the addition of the Verde branches CFS will have around 1000 branches.

In the digital space CFS has in the past won many awards for its direct bank, Smile, but the lack of investment in this operation  has meant that it has not kept up with what customers are looking for from a digitally-enabled bank and is not sufficiently different to attract customers away from more traditional players. The same could be said of Intelligent Finance, the brainchild of Jim Spowart, which CFS acquires as part of the Lloyds Banking Group Verde bundle.

For CFS to really become the challenger that the ICB is so keen for it to be then CFS needs to significantly invest in fundamentally changing the branding and customer proposition that the combination of Co-Operative Financial Services, Britannia, TSB, Intelligent Finance and Cheltenham & Gloucester brings. With such a diverse group of brands with different values and attracting different segments it will not be clear to customers what it stands for and why they should engage with it. CFS will need to simplify, move to a single brand with a strong customer proposition which is more than just being an alternative to the other banks. It needs to design a customer-centric bank where branches are but one part of the overall way that customers can engage, digitially enabled and fit for 21st Century Customers. That requires a lot of investment, above and beyond the capital required to acquire Verde, the hundreds of millions required to integrate Verde whilst still keeping the lights on, and ensuring the Verde customers don't defect before they are transferred. With no shareholders to turn to and the wholesales markets still not working efficiently finding the funding at an affordable price is an enormous challenge for CFS.

Over the following few months as the negotiations continued with Lloyds Banking Group, CFS got to understand more about what it is undertaking, but still has to establish whether it can raise the funding and only then will it become clear whether CFS is going to be able to close the deal. If they do, but don't invest in the transformation, then what the UK consumer will get is just another high street bank and the hopes of a challenger that the ICB had will be just that, hopes. If CFS embraces the challenge then the re-born CFS could be a really exciting, ethical, customer-focussed challenger and the Big 5, as they wrestle with implementing ring-fencing, should be seriously worried.

The concerns don't only lie with the Co-op. For Lloyds Banking Group having just come off the back of spending nearly £4bn on the integration of Lloyds TSB and HBoS, the question of just how much it will cost to separate what constitutes Verde from the mother ship is concerning. Anything over £1bn would be a real challenge for LBG given everything else they have on their agenda. The Co-op target systems are not ideal, particularly as they still haven't completed the integration of Britannia, so increasingly the deal may be looking less attractive to LBG.

As is increasingly looking likely they reverse their existing banks into Verde sticking with the LBG systems, they will end up with superior systems than they have today. Unlike RBSG, the Lloyds Banking Group systems, based on the original TSB systems are real-time and not significantly batch-based. This gives them significant advantages in dealing with customers demanding real-time banking. However CFS will end up with the suboptimal LBG systems as Lloyds is spending significantly on 'simplifying' their systems, but only for the LBG version not the ones going to Verde. This means that Verde will be disadvantaged to LBG, so may not be as competitive.

The FSA (Financial Services Authority) is now demanding that, assuming the Verde deal goes through, given that Financial Services will be around 40% of the Co-op's business that the governance appropriate to a bank is put in place. This would mean having a board made up of executive and non-executive directors that would need to be FSA approved. Given the time it is currently taking for the FSA to approve executives is measured in months not weeks and that the Co-op doesn't currently have a CEO for its Financial Services business (though interestingly Gary Hoffman has allegedly had conversations about filling this role) this could be a deal breaker. However Lloyds Banking Group could sweeten the deal by providing a team of seasoned managers to run the business. Whilst this might put the FSA's concerns about leadership experience to bed, how radical will this new competitor be if it is being run by the same people who ran Lloyds Banking Group?

On top of that the Co-op as a co-operative is currently governed by its members. The FSA's requirements fundamentally challenge the way that the Co-op wants to run its business.

The possibility of  CFS walking away from Verde is looking increasingly unlikely.
There is still the chance that an  IPO is the more attractive solution for LBG given how cleaner and simpler that will be for the bank, however with bank asset prices at an all time low at what price would the IPO get away?

It looks like CFS may have got their deal, but will they suffer from buyers' remorse?