Showing posts with label Yorkshire Bank. Show all posts
Showing posts with label Yorkshire Bank. Show all posts

Thursday, 30 April 2015

Can Yorkshire Bank and Clydesdale Bank become challengers?

The latest results from TSB have demonstrated that it is possible for a bank spawned from a global retail bank to be a challenger in the market. With National Australia keen to get rid of its northern hemisphere business, Nab UK consisting of the Clydesdale and Yorkshire brands, could this business be the base upon which a challenger bank is built?

A history of innovation

There have been several attempts to make Clydesdale/Yorkshire challenger brands particularly under the leadership of former Woolwich Building Society executives John Stewart and Lynne Peacock. After all they were the first people to introduce the concept of speed dating for SME customers whereby customers could meet other customers in the bank’s business centres with a view to starting a new business to business relationship.

Before that in the first internet boom it was Clydesdale Bank that launched Kiboodle a b2b portal for customers to buy and sell products using an online catalogue.

Lynne Peacock also tried to invigorate the bank and take on the Big 4 banks in the SME sector by opening up new banking centres particularly in London and the South East. That may be where there is the most money but it is also where there is the most banking competition. Looser lending criteria in order to build market share has been a major contributor to the current problems that Nab’s UK business has with major writedowns on loans made at that time.

What would it take to become a challenger?

So if National Australia has failed to make its UK operations a significant challenger to the now Big 5 banks (HSBC, Barclays, Lloyds Banking Group, RBS, Santander) what would it take to change that?

What Yorkshire Bank and Clydesdale Bank require to become significant challengers to the major banks would be significant investments in digital and core banking to deliver both the sort of customer experience offer the propositions that will attract customers of the Big 5 Banks to switch to them. The banks need to become significantly more efficient and that can only be brought about by investing heavily in automation.

Clydesdale Group is expected to be floated, or preferably sold, in either in 2015 or 2016. What will any purchaser of equity or the business actually be getting?

What do Yorkshire Bank and Clydesdale Bank bring?

Yorkshire Bank and Clydesdale Bank are very strong brands with a high level of customer loyalty. According to Yorkshiremen Yorkshire is God’s country and anything from Yorkshire is better than from anywhere else. That loyalty by Yorkshiremen to the bank extends way beyond Yorkshire. Maximising the value of that brand and the pride in Yorkshire could be key to future success.

The Clydesdale brand is equally strong in Scotland and particularly after the nationalisation of both RBS and Halifax Bank of Scotland (through being acquired by Lloyds Banking Group). Should another referendum on the independence of Scotland result in a ‘Yes’ vote then Clydesdale Bank could become the only bank headquartered in Scotland which could attract a lot more Scottish customers post independence.

Between them Clydesdale and Yorkshire operate 298 retail branches, 42 business and private banking centres mainly in Scotland and the north of England as well as having online operations.  That is comparable to the 316 branches that the still to be launched Williams and Glyn Bank (to be spun out of RBS) will have.

Clydesdale bank is the official issuer of Scottish banknotes and 50% of the currency in circulation in Scotland has been issued by the bank and has the brand on them. No other bank in the UK has their customers reminded of them every time they spend money. Clydesdale is also the first bank in the UK to issue plastic bank notes.

With loan balances in excess of £27bn, deposit balances of £23bn the two banks are comparable  in size and efficiency with Virgin Money.

Who might be interested in acquiring Yorkshire and Clydesdale?

Prior to the offer to buy TSB by Sabadell it had been rumoured that TSB might have been interested in acquiring the business. However one of the stumbling blocks was that there was a significant overlap in branches in Scotland and that would significantly reduce the value to TSB of the businesses.

Theoretically bringing Nationwide Building Society and Yorkshire and Clydesdale banks together should be an ideal arrangement.  It would significantly boost Nationwide’s presence in the north and Scotland. In return Yorkshire and Clydesdale could replace their legacy systems with Nationwide’s new, state of the art, SAP core banking system and significant investments in digital. Nationwide has significant experience of integrating businesses (Anglia Building Society and the Portman Building Society among others) and driving down the Yorkshire and Clydesdale’s efficiency ratio from an eye-watering 70% to much closer to Nationwide’s own 50%. However one of the downsides of being a mutual is that it is far more difficult to raise capital and therefore as sweet as this deal might be it is unlikely to be feasible.

A merger of Nab UK and Virgin Money would not make sense given the significant overlap of their branch locations even though the combination would build a challenger with sufficient critical mass of customers and assets to start impacting the Big 5 banks. Neither Virgin Money nor Nab UK have a suitable banking platform to build a challenger bank on so there  would need to be a very significant investment required to get the efficiencies and customer experience to the level required to challenge the big banks. Virgin Money has a similar cost:income ratio to Yorkshire and Clydesdale. The level of investment required and the payback period are likely to put off the existing investors in Virgin Money.

An argument could be made for Santander to acquire the business as it would significantly boost their presence in Scotland and the North and it has the technology platform in Partenon that it could migrate Nab UK onto, having already done this for Abbey National, Bradford & Bingley and Alliance & Leicester. However Santander likes to be a distress purchaser and never likes to pay over the odds. In addition two of the core assets of Nab UK the Yorkshire and Clydesdale brands would not be of value to Santander and the subsequent re-branding to Santander could lead to a significant loss of customers loyal to the Yorkshire and Clydesdale brands. All of this makes it unlikely that Santander will want to acquire the business at a price that Nab is prepared to accept.

A question then would be whether a foreign investor could be interested in acquiring the businesses off Nab. Given that Abbey was acquired by Santander, TSB will most likely be acquired by Sabadell then the large global Spanish bank BBVA could be a contender. With its focus on being both a bank and a software business and its recent acquisition of Simple, the US digital bank, then it would be surprising if they didn’t consider this as their opportunity to get into the UK retail banking market.

These are all questions that the incoming CEO for the Nab UK business, former AIB CEO David Duffy, will have to address as he prepares the business for IPO and potential disposal.

 

 

Wednesday, 21 January 2015

Why 2015 won't be the year of the challenger bank


When politicians and consumer finance champions talk about challenger banks they are looking for new players to eat into the 77% of the current account market and the 85% of the small business banking market that the Big 5 (Barclays, Lloyds, HSBC, RBS and Santander) currently have.

The figures from the Financial Conduct Authority for potential new banks could give the impression that 2015 could be the year that finally the Big 5 sees their market share being significantly reduced:

6 banking licences issued
4 banks proceeding through the application process
26 new banks being discussed

In addition there are already the likes of Nationwide, Co-op, TSB, Yorkshire Bank, Clydesdale Bank, Metro Bank, One Savings Bank, Handelsbanken, Aldermore, M&S Bank, Tesco Bank, Virgin Money and Shawbrook operating in the UK.

However on closer scrutiny the picture isn't quite as rosy and is unlikely to cause any executive from the Big 5 banks to lose any sleep.

The existing “challengers” broadly fall into one of four camps.

Camp 1: Existing established Players:

Nationwide

Co-op

Yorkshire Bank

Clydesdale Bank

Post Office (Bank of Ireland)

The established players have been operating current accounts in the UK market for many years, Nationwide being the newest of these to this specific market. Despite having been in the market for some time these established players’ impact on the market share of the Big 5 has been minimal. Nationwide is the most proactive in trying to acquire new customers within this group as is reflected by their being one of the biggest beneficiaries since the introduction of 7 Day Switching. Their market share is small but growing and its offering is something that clearly appeals to customers who do not like the Big 5 banks.

Camp 2: Banks created from former banks:

One Savings Bank (Kent Reliance Building Society)

TSB (Lloyds Banking Group)

Virgin Money (Northern Rock)

Williams & Glyn (RBS) – still to be launched

These are all banks that have (or will) relaunch themselves and have existing customers, branches and IT infrastructure. What this means is that in terms of offering a true alternative to the Big 5 banks they are limited by the legacy technology and cost bases they have inherited when they were set up. In the case of TSB and Williams & Glyn both of these were compulsory disposals by their parent banks following the 2008 financial crisis, however both of them have significant shareholdings by Lloyds Bank Group (TSB) and RBS (Williams & Glyn) so whether they can really be seen as challengers when they are still owned by one of the Big 5 is questionable.

One Savings Bank does not offer a current account and is focused on the specialty lending sector. Virgin Money does not currently market a current account.

Camp 3: Banks owned by larger organisations

Handelsbanken

Tesco Bank

M&S Bank

These three are each quite different.

Handelsbanken which has more than 175 branches in the UK has its parent company in Sweden. It is primarily focused on SME banking but does offer a personal current account. It is building a presence and has very high customer satisfaction but is still sufficiently subscale to not be a threat to the market share of the Big 5. However it is picking off customers that the Big 5 banks would rather not lose.

Tesco Bank has only relatively recently launched its current account so it is difficult to judge how successful it will be. With the size of the Tesco customer base and the insight it has into its customers from the Clubcard it has the potential to be a serious challenger however achieving sufficient scale will be beyond 2015. There is also a possibility with the woes of Tesco that the bank could be a candidate for disposal which could change significantly Tesco Bank’s market position.

M&S Bank while it does offer current accounts cannot be seen as a challenger as it is owned by HSBC, one of the Big 5 Banks. 

Camp 4: Greenfield challenger banks

Metro Bank

Aldermore

Shawcross

Atom Bank

Charter Savings Bank

Hampden & Co

These (and there are more) are the genuine upstarts the ones that are doing or planning to do something different in the market. The last three are still to launch. They are all primarily Private Equity funded.

Of those listed on Metro Bank offers a personal current account and Atom has a stated intention to offer one.

What each of these Greenfield challengers does not offer is scale and will certainly not bother the Big 5 banks in 2015.

Big 5 bank executives can sleep easy in 2015
When an examination is made across the four Camps as described above the inevitable conclusion is that while there may be some headlines and excitement about the number of potential challengers in and coming into the UK banking market there can be no doubt that in 2015 there will be very little dent in the current account market share of the Big 5 banks.

Friday, 3 October 2014

The FCA is wrong to focus on account portability

The news that the FCA is to explore the move to full account portability as part of a review of current/checking account switching is disappointing as the FCA appears to be rushing to a solution without having really understood why customers are not switching their account providers at the levels that politicians and consumer lobbyists would like to see. The reason that these parties wish to see higher levels of switching is that they see this as an indicator of competition in the current account market which is dominated by the big five banks – Lloyds, Barclays, RBS, HSBC and Santander.

Customer switching has gone up by only 19% since 7 day switching was introduced

The FCA have been triggered into action by their disappointment at the low increase in the level of switching following the introduction of seven business day current account switching service introduced in October 2013. Despite the investment of $750m by the large banks in creating this guaranteed switching service levels of customer switching has gone up by only 19%.

The large banks have been the beneficiaries of switching

The irony is that the biggest beneficiaries of the account switching services have been Halifax (part of Lloyds Banking Group), Santander (one of the world’s largest banks), Nationwide Building Society and TSB (a Lloyds clone and still partially owned by the bank). With the exception of Nationwide, the account switching service has done little to change the market share of the major banks and even Nationwide has hardly changed the percentage.

The parallels between mobile phone numbers and account numbers are not valid

However for the FCA to jump to the conclusion that this is down to customers being reluctant to change their bank account number and therefore account portability will change this is both bizarre and illogical. Parallels are often made with the mobile phone industry where phone number portability has encouraged customers to switch between providers. However the use of phone numbers and bank account numbers are quite different. Whereas in order for telephone customers to be able to keep in contact with the hundreds and even thousands of people who have their number programmed into their phones keeping their mobile number when changing suppliers is essential the same cannot be said for bank account numbers.

Most bank customers have not memorised their bank account numbers. Once access to internet and mobile banking is set up a customer very rarely needs to know that number. When paying bills, transferring money, checking their balances, setting up or changing direct debits or standing orders there is no need for customers to know their bank account number. With the seven day switching services direct debits are transferred and guaranteed that if a problem occurs that the customer will be refunded for any charges occurred during the transfer process. With the increasing availability of P2P (Person to Person) mobile banking applications such as Pingit customers only need to know the mobile phone number of the person that they are transferring the money to (which is very likely to be stored in their phone) and don’t need to know the bank account details of the person that they are wanting to transfer money to. It is a fallacy to say that the reason people are not changing their bank accounts is because they don’t want to change their bank account number.

Customer interest in switching accounts is far lower than politicians and lobbyists

One of the primary reasons that is quoted despite the Seven Day Switching Service making it far easier for customers to switch current accounts is what politicians refer to as ‘customer apathy or inertia’. The reason that customers aren’t bothered is because for most customers banking really isn’t that interesting (until it goes wrong or they have a financial crisis), that the actual amount that they would save by switching from one bank to another is so minimal that it isn’t worth the effort and that they see one bank account much the same as another. To most customers banking services are a commodity and a largely undifferentiated one. They have better things to do with their lives than monitor whether one bank account is better than another.

There are significant numbers of providers of current accounts

The fact that the main beneficiaries of account switching have been the larger players is not because there is not a lot of choice in the market. Examples of organisations offering personal bank accounts include Nationwide Building Society, Tesco Bank, Marks & Spencer Bank, Metro Bank, Co-op Bank, Yorkshire Bank, Clydesdale Bank, Bank of Ireland (via the Post Office) and Handelsbanken.

The reason that Halifax, Santander, Nationwide, TSB and Metro Bank (though on a lot lower scale than the other four) have been successful in getting current account customers to switch to them is because of their attractive propositions whether it be paying interest on current account balances, discounts on utilities and other bills, convenience of branches or even offering dog biscuits. The fact that some of the most attractive propositions have come from the larger banks is because for most banks most personal current accounts are either loss leaders or have very low margins and therefore to be profitable in the current account market you need scale. That is very difficult and takes a lot of time to build from scratch as Metro Bank is finding.

Many of the so-called challenger banks e.g. Aldermore, Shawbrook, OneSavings Bank and Handelsbanken are not even attempting to engage in the personal current account market because of how unattractive it is financially. They would rather focus on the mortgage market or SME banking where the margins are higher and the cost to enter the market are far lower. As Virgin Money comes to the market it is based on the profits from mortgages and credit cards that the value will be attributed not current accounts.

The FCA is not focusing on the real issue

If the FCA is really interested in seeing greater competition in the current account market then rather than investigating a solution to a problem that doesn’t exist (customer only don’t switch because they don’t want to change their bank account number) then they should look at how to make it more attractive for the existing sub Big Five and new players to engage in the market with customer friendly banking propositions. It is only when there is significant differentiation between bank accounts in customers’ minds that switching volumes will become significant.

Wednesday, 28 May 2014

New NAB CEO faces challenge of what to do with Yorkshire and Clydesdale Banks


With Cameron Clyne leaving National Australia to spend more time with his family, incoming Group CEO, Andrew Thorburn, will have to face the perennial question of what to do with the bank’s UK businesses. For many years Yorkshire Bank and Clydesdale Bank have been seen as albatrosses hanging around the neck of the incumbent Group CEO of National Australia. With Nab’s focus on growing in their domestic market and Asia the two banks have long been seen as non-strategic.

During the financial crisis Nab had to invest nearly £1.5bn of capital into the business to shore up the balance sheet. There have been challenges with non performing loans as well as redress for misselling of PPI to add to the woes. As part of a plan to improve the performance of the business there has been a significant cost cutting exercise that resulted in the removal of 1,400 jobs and the closure of 29 banking centres. There has also been a withdrawal from London and the south of England.
However for many years both banks have been starved of any significant investment to improve them and to make them better able to compete in the UK market. It is not since the Brit John Stewart was Group CEO and fellow Brit Lynne Peacock was running the UK operations that any significant effort was put into innovation and growing the businesses in the UK. Indeed large parts of the strategy for the UK banks set out by Stewart and Peacock were reversed during the cost cutting exercise. (Recent news that Clydesdale Bank is to issue Britain’s first plastic £5 note hardly counts as innovation).
Nab in Melbourne have for a long time been very open about the fact that Yorkshire Bank and Clydesdale Bank are seen as non-strategic. The market has been sounded out for interest in acquiring the business. At one point it was rumoured that Santander was interested in acquiring the business but no deal has emerged. A key on-going challenge for the Nab Group CEO has been that there has been a significant gap between the value that the UK operations are held on the balance sheet and the price potential acquirers are prepared to pay. This situation has deteriorated even further since the crisis in 2008 with both bank valuations dropping and the interest in acquiring banks disappearing. For Nab, either no  Group CEO wanted to take that write off on their watch or the Board wouldn’t let him.
There is no doubt that there has been and continues to be a lot of dissatisfaction from analysts and investors about the financial performance of Nab in its local domestic market. It is seen as the laggard of the Four Pillars. The challenge for Andrew Thorburn is to turn around that perception. Whilst the UK operations are definitely not the highest priority in terms of fixing the business they are seen both as a distraction and requiring significant capital that could be better deployed elsewhere.
So as Andrew Thorburn starts his role as CEO in August 2014, will he do something to resolve this issue and what are his options for the UK operations?
The ideal outcome for the new CEO would be to sell the UK operations and minimise the write off. The question though is who would want to buy them?
On paper Yorkshire Bank and Clydesdale Bank could be challenger banks. They both have strong brands with loyal customers. The Yorkshire brand stretches way beyond the county boundaries. Clydesdale is seen very much as a Scottish bank and one that has managed to maintain its reputation far better than either Royal Bank of Scotland or HBoS, its two main rivals. This could make it attractive to Private Equity firms, for instance JC Flowers might wish to merge it with its OneSavings Bank. It could also be attractive to other Private Equity firms looking to establish a foothold in the UK retail banking market. However the timing for One Savings Bank is not good as they have already announced that they are to float and that is where their focus in the short term will be.
The challenge for anyone evaluating Yorkshire and Clydesdale is, apart from their customer base, what is there of value to acquire? Between the Yorkshire and Clydesdale they have 322 branches, a very similar number to the branches that Williams & Glyn (the challenger bank being created from the forced disposal RBS has to make) will have. However, as is becoming increasingly apparent to both established and challenger banks, the use of branches by customers is declining and therefore the value of having an extensive network of branches is reducing. As both RBS and Lloyds found out finding buyers for their branches was not easy with both, respectively, Santander and Co-op withdrawing their offers after long protracted negotiations. The additional challenge with the Yorkshire and Clydesdale branches is that significant investment by the buyer would be required to bring the branches up to  a standard customers expect today due to the lack of investment by Nab over the last few years.
If a new entrant was looking to acquire the Nab UK operations and they wanted to initially use the Nab IT platforms then if they wish to be competitive they would need to invest very heavily over the medium term on new platforms, as the Nab platforms are old and in need of retiring.
With a cost income ratio of 76% there is a lot of efficiency gains to be driven out by the right owner, but the question is the level of investment to achieve this and over what time period.
Given the level of investment that any new entrant would need to make in order to use the UK operations as a platform for competing in the UK retail banking market, the price that they would be prepared to offer is highly unlikely to meet the amount sitting on the Nab balance sheet.
Given Nab’s situation it is easy to understand why a couple of years ago Santander were rumoured to be interested in acquiring the UK operations. Santander has its own platform, Partnenon, and has a track record of being able to migrate bank accounts onto its systems – Abbey National, Alliance & Leicester and Bradford & Bingley. The challenge for Nab is that Santander is a distress purchaser and never knowingly overpays.
If Nab can’t sell Yorkshire and Clydesdale at an acceptable price then what about a flotation? Timing is a real challenge here as there has never been a time when more banks are coming onto the market. TSB, Aldermore, OneSavings Bank,William & Glyn, Virgin Money, Metro and Shawbrook have all announced intentions to come to the market over the next eighteen months. Investors are spoilt for choice. Along with the recent disappointing flotations (Saga, JustEat. AO, etc), albeit in other sectors, there will be a downward pressure on prices and consequently the amount of capital that will be raised.
Another option is to do nothing and let the two brands continue to operate as they are today, continue to reduce costs and improve performance with minimal investment and allow the business to slowly decline as customers move away to competitors when they are attracted by better offers.
There is no immediate need for Andrew Thorburn to make a decision about the future of the UK operations particularly given the uncertainty with the Scottish Referendum occurring in September 2014. The UK operations operate under a Scottish banking licence and a ‘Yes’ vote could create a long period of uncertainty and have a significant impact on the value of the UK operations.
However as a new CEO there is a grace period during which there is an opportunity as the new broom to look with fresh eyes at all the problems. It is an opportunity to announce write offs, set the bar and expectations low and then over-perform. Thorburn should take full advantage of this initial period of goodwill to be quite clear what his plan is for Yorkshire and Clydesdale to end the uncertainty for customers, colleagues and investors.

Tuesday, 2 July 2013

Can TSB really be a challenger bank?

With the letters going out to effected existing Lloyds' customers and the announcement that from September 632 Lloyds Banking Group branches will be re-branded 'TSB' does this herald a new competitor in the UK banking market or it just a mini-me Lloyds Bank brand? This is a question that will not only be asked by those customers being migrated to the 'new' bank but also by existing Lloyds' customers, politicians, banking regulators and the European Union. Ultimately it was the European Union that has forced the launch of TSB as a consequence of the state intervention required after Lloyds TSB was compelled to buy HBoS.

From September TSB will have the same products, the same propositions, the same terms & conditions, the same computer systems (or at least a copy of them), the same staff  and the same executive team as they do now and have had for some time. The branches will be re-branded but the staff that work in them will be the staff that worked in the same Lloyds TSB branch, working to the same incentives.

In many respects for customers who have chosen to join Lloyds TSB and are being forced to switch to TSB this could be seen as positive as their new bank will be re-assuringly the same. However over time, if TSB is to become a challenger to the established banks then this will need to change.

One of the most important requirements for TSB to become a challenger is to have different ownership. Lloyds Banking Group has applied to the EU for a two year extension to the deadline to sell off the 632 branches. As this is written there has been no indication whether this has been granted. Whether this comes from an IPO (most likely) or from a single or syndicate of investors wishing to buy TSB time will tell. However Verde, as the project  to separate and sell the branches and supporting infrastructure was called, has been running for some years already and no one has come forward with a compelling and executable proposition to buy the business. (The Co-op's proposition proved to unviable and the NBNK proposal was rejected by Lloyds Banking Group as being insufficiently commercial, though whether that was a political decision is a moot point)

Whilst TSB is still fully owned by Lloyds Banking Group it will be no more of a true challenger to the Big 5 banks (Barclays, RBSG, Lloyds, HSBC and Santander) than its sister brand, Halifax.

Credit where credit is due Lloyds Banking Group knows how to run separate brands off the same systems and processes and has done it very successfully since the integration of Lloyds TSB and HBoS was successfully completed. Halifax is seen as an edgier, cost conscious brand than the more conservative Lloyds brand. The Halifax executive team have largely been kept in tact and have been able to retain much of the culture of the bank prior to takeover.The staff still identify with the brand they work for. Indeed to many customers Lloyds and Halifax are quite separate banks and there are customers who move to Halifax to get away from Lloyds and vice-versa. However ultimately both banks report into the same Lloyds Banking Executive, Alison Brittain and she reports to Lloyds Banking Group CEO, Antonio Horta-Osario. Both banks answer to the same shareholders principally the government.

It is a fallacy that there is no competition in UK banking, there are an increasing number of players out in the market offering retail banking services - Nationwide, Yorkshire Building Society, Yorkshire Bank, Clydesdale Bank, M&S Bank, Co-operative Bank, Tesco Bank, Sainsbury's Bank, Metro Bank, Virgin Money to name just a few. However it is true that the Big 5 still continue to have the dominant market share. With the introduction of easier switching in the Autumn the excuse that it is too difficult to change banks will be taken away. The fundamental reason that customers don't switch banks as much as politicians and regulators would like is that banking is to a large extent seen by customers as a commodity and really not that interesting. Banks are also seen as being as bad as each other so why customers can't be bothered changing when it really won't make a lot of difference.

For TSB to be a real challenger then it needs to be able to answer the question of what can it offer that will make those not compelled to become its customers to switch their banking business to TSB.
This has the potential to be a bigger hurdle for TSB than for some of the other players. The executive team of TSB are highly capable people, but they have worked for Lloyds Banking Group for a considerable period and a question is whether have been immersed in that culture and that way of doing business are they able to come up with a fresh way of delivering banking that will be attractive to their customers? If they are able to come up with a fresh proposition will they be able to actually deliver it given that they will be dependent upon Lloyds Banking Group and its legacy systems to deliver their proposition? Given their size in comparison to Lloyds Banking Group and the other Big 4 will they be able to invest enough, particularly in all things digital and mobile to be able to compete with the far larger budgets that the others have?

Is the reality that despite all the best intents and capabilities of the leadership of TSB that with the restrictions laid on them such as ownership, access to capital, size and dependency on Lloyds Banking Group that the best that can be expected from TSB is a slightly less good mini-me?

Only time will tell, but for the good of consumers and for the health of the retail banking industry in the UK it is has to be hoped that TSB will emerge as a strong challenger bank.

For official answers on how TSB will operate go to
<a href="http://www.tsb.co.uk/">www.tsb.co.uk/</a>

Tuesday, 16 April 2013

RDR reducing access to advice for customers



The Retail Distribution Review (RDR) introduced by the UK Labour Government was aimed at improving the quality of advice provided to customers and the transparency around the charges for that advice.

With the annoucement first by Barclays in January 2011 and then by HSBC in May 2012 of their withdrawal from providing investment and Life & Pensions advice to the mass market, rather than help the customer, RDR has in fact reduced customer access to advice. Both banks have stated that the reason for their withdrawal has been that the business is no longer viable for them commercially. The additional cost of training their staff to meet the high standards laid down by RDR and, undoubtedly, the size of fines and the risks associated with mis-selling of these products, has made it unattractive for them to continue in this business.

RBS is neither fully exiting or getting behind branch-based mass market advice. Their announcement that they will be laying off 618 advice based staff is a reflection of the reality that if you move from what is perceived to be a free service (even though consumers are paying commission through the annual fees hidden in their investments) to one which is fee-based inevitably volumes will drop.

Lloyds Banking Group had been saying that they would continue to provide advice to mass market customers. However when they asked customers  about this what they  found "for the majority of our customers, demand for a fee-based financial planning advice service decreases when they have lower amounts to invest,". As a consequence they have announced that they will only be offering advice (for a fee) to those with more than £100,000 of investable assets. They will continue to offer a non-advised service through the Halifax, Bank of Scotland and Lloyds TSB branches. Around 1,000 branch staff will be impacted by this change and will be offered either a new role or redundancy. Given this move by Lloyds Banking Group the argument for selling off Scottish Widows becomes even stronger (see http://www.itsafinancialworld.net/2012/05/why-lloyds-shoudnt-dismiss-selling.html ).

Interestingly Santander is taking a contrary position and on hearing of the layoff of the HSBC staff allegedly approached HSBC with a view to hiring those laid off.

However even Santander is now reconsidering this position. In February 2013 they are being investigated for giving poor advice following mystery shopping by the FSA uncovering poor practices. Shortly before Christmas 800 advisers were suspended for retraining. A review of strategic options is now under way. In March 2013 this concluded with the withdrawal of face-to-face advice for new customers, putting at risk 874 jobs. A new team of 150 advisors will be deployed to serve existint customers.

In April 2013 Clydesdale, Yorkshire and Co-op announced the withdrawal of advice from their branches. In their case this was supplied by Axa. According to the Financial Times, Paul Evans, chief executive of Axa UK, said he was “very disappointed” that the division “must also now withdraw this service having not found a model which balanced the regulatory requirement that the service be profitable in its own right, whilst setting advice fees at an affordable level.”

The exit is not only being seen amongst the big players in the market. The building societies are also withdrawing from the market. In early 2011 Norwich  & Peterborough Building Society sold their sales force to Aviva and withdrew from the market. There are also large numbers of IFAs (Independent Financial Advisors) who due to the cost of funding the training and the amount of studying are withdrawing from the industry, again reducing accessability to advice for the lower to middle income customers.

This is creating a very serious problem. With all of us living for longer and the cost of living, particularly in the later years rising, with the reduction in employer provided pensions benefits, there is an increasing need for individuals to save for the longer term, to invest in individual pensions and to provide for their loved ones through life assurance. With the options complex and becoming more complex there is an increasing need for advice, however what RDR has done is reduce access to that advice.

With the availability of advice for investment products being reduced the current UK Government is now putting in plans to reduce the accessibility of advice for mortgage products. Similar to RDR the Mortgage Market Review (MMR) set out to protect customers but is fact making it far more difficult to get advice. For instance should a customer phone up a bank such as First Direct and ask about mortgage products the bank employee will not be able to talk about the difference between a fixed-rate mortgage versus a variable rate mortgage since that would be seen as advice and without completing a fact find that will no longer be possible. This could once again, see mortgage advisors and brokers withdrawing from the market.

Not all banks are withdrawing from either the investment market or the mortgage market. There are those who are considering the commercials and rather than quitting are looking at innovative ways of improving productivity of their advisors. Both Bank of America and Bank of Moscow have pilots out using videoconferencing to bring the advisors virtually to the branches. With the increasing acceptance of videoconferencing through the likes of Apple's Facetime or Skype, the availability on devices such as the iPad, then those organisations with the imagination may still be able to find ways to commercially provide advice to the mass market.

Of course videoconferencing does not overcome the requirement to have fully trained and qualified advisors, since selling through videcconferencing is no less regulated than through branches or contact centres. What it does mean though is that through the higher productivity brought about by the advisors being able to support multiple branches less advisors are needed and the cost of providing advice is therefore reduced.

What RDR shows, once again, is that when governments with all good intentions create regulation for the Financial Services sector the effect on customers is often the opposite of what they intended. Governments should spend more time considering and discussing regulation with customers and the industry (and not instantly assume that whatever the banks say is wrong and out of self-interest) and resist the temptation to rush out populist regulation.

Tuesday, 1 May 2012

NAB withdraws to the north - the end of innovation?



The announcement by National Australia Bank (NAB) that they are to close 29 of their business lending centres in the south-east of England and withdraw back to their northern roots, abandoning 80,000 customers, marks the end of an experiment initially started by John Stewart, then CEO of NAB, and more recently Lynne Peacock, until last year CEO of NAB in the UK.

John Stewart and Lynne Peacock worked together for many years at the Woolwich Building Society, where they were responsible for launching the UK's first flexible mortgage, the Open Plan mortgage, combining a savings account with a mortgage account, offsetting savings interest against mortgage interest. Ironically the Open Plan account was based on Australian flexible mortgages. Such was the success of the Open Plan account that Barclays decided to acquire The Woolwich and centre their mortgage business around their acquisition.

John Stewart was seen as an entrepreneur,leading Financial Services industry development and was subsequently hired by NAB to lead the business in Melbourne. He brought Lynne Peakock along, initially in Melbourne and then to lead the UK business consisting of Clydesdale Bank and Yorkshire Bank.

Once again, looking at how he could make a small player in a crowded market stand out from the crowd, he and Lynne Peacock came up with a strategy to take the strong Yorkshire Bank brand down to the sout-east and take on the Big 4 banks in their traditional territory. They came up with an entrepreneurial model where banks managers were allowed to operate like a franchise, to be directly rewarded for the performance of their branches, or Business Lending Centres, to be able to make lending decisions with less referral to the centre and therefore quicker decisions for customers. Their Business Lending Centres look like airline lounges, customers could use them to conduct their own business when in town, creating a very different customer experience. They even went so far as to organise 'speed-dating' for buinesses, whereby SMEs could meet other SMEs in order to do business with each other introduced by NAB. At the time  NAB was, once again, seen as leading the way in terms of a new banking model, of a new customer experience and indicating where the banking industry needed to go. The model was successful with the lending book growing at above market rates.

Many of the ideas that he and Lynne Peacock came up with have been emulated by other banks such as Handelsbanken (see http://www.itsafinancialworld.net/2012/02/who-said-branch-banking-was-dead.html , http://www.itsafinancialworld.net/2011/06/forget-virgin-money-or-metro-bank.html ), where the bank manager is master of his own business. NBNK in describing the type of banking they want to launch also describes something that is very similar to the NAB model. Metro Bank has gone some of the way towards this as has Virgin Money.

The reason that this has not worked for NAB is twofold. Firstly the focus was on commercial property lending. Since even before 2008 the commercial property market was overheating and finally burst, but like HBoS, NAB continued to lend and has, as a result, got a disproportionate amount of bad loans. Undoubtedly one of the reasons why the book grew so fast was because of the franchise model where the managers were paid in direct relation to the loans they made, which encouraged lending and discouraged caution. The second reason is that whilst NAB provided an excellent customer experience the customers were not prepared to pay for that. This is something that many banks face in a heavily commoditised market where there is the perception of 'free banking'.

In many ways it is a great shame (not least for all the people who will lose their jobs), that what NAB set out to do has failed. Certainly a number of the players, such as JC Flowers and NBNK, who have stated that they want to enter the UK banking market should consider whether acquiring the UK southern assets of NAB should be an option, rather than acquiring all of NAB UK.

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?

Thursday, 31 March 2011

Bank of Ireland forced to dispose of UK Operations?

Update: 170511. With the FSA to investigate the claim that the Bank of Ireland's UK operation is a 'sham bank' this could do one of two things either accelerate the disposal of the UK operations or result in the value of the UK operations dropping like a stone if their UK banking licence is suspended.

Shares in Bank of Ireland and Allied Irish Bank have been suspended today (Thursday 310311), pending the publication of stress test results later today. The stress tests are expected to show that far more capital needs to be pumped into the two banks than was predicted at the end of last year. There are rumours that Bank of Ireland may need to be nationalised as a result.

Will one of the consequences of taking additional state funding be that Bank of Ireland will be forced to dispose of its non-Irish operations? Given that toward the end of last year the UK operations were put into a separate subsidiary this would be easier to bring about than it might have been. See http://www.itsafinancialworld.net/2010/11/time-to-break-up-bank-of-ireland.html which posed this question in November of last year.

Adding the Bank of Ireland UK operations to the 600 branches of Lloyds Banking Group, Northern Rock, Yorkshire Bank and Clydesdale Bank and a number of building societies potentially up for sale, the opportunities for new entrants into the UK banking market are plentiful. Bad news for the UK Government and for UK tax payers having such a large number of businesses up for sale is bound to drive prices down.