Showing posts with label investment banking. Show all posts
Showing posts with label investment banking. Show all posts

Friday, 29 May 2015

Why banks should see ring fencing as an opportunity

Banks in the UK should be seeing ring-fencing as an opportunity rather than trying to wriggle out of or diluting the effects of the legislation.

Ring-fencing, the separation of the retail business from the non-retail business is estimated to cost each of the major banks between £1.5 and £2.5bn to set up and a subsequent additional annual charge of between £1.7bn and £4.4bn to run. Each of the UK banks are looking differently at what will be inside the ring fence and what will be outside. For instance Lloyds Banking Group, which is largely UK and retail banking focused, is looking to have most of the existing group within the ring fence and only the corporate bank outside of it. On the other hand Barclays is looking to put the minimum, the UK retail bank inside, while businesses like Barclaycard and the corporate and investment bank would be kept outside the ring fence. HSBC appears to be looking at a similar model to Barclays with the UK Retail Bank – effectively HSBC, First Direct and M&S Bank inside the ring fence with the rest outside with the distinct possibility that the Head Office of the Group would be relocated to Hong Kong.

However the UK based banks are seeing ring-fencing very much as an unavoidable problem that is both unnecessary and expensive.

There is a different, more positive point of view and that is the ring-fencing activity should be seen as an opportunity to fundamentally re-think both how the bank should operate and make those major investments that it has never been quite the right time to implement. Ring-fencing should be seen as a means of investing in the business in order to both reduce the cost base and enable the bank to better compete in the UK market.

Implementing a culture that results in market leadership

Since 2008 there has been a lot spoken and written about changing the culture of banking, moving from the Gordon Gecko ‘Greed is good’ investment banking culture  and back to one where the role of bankers is to serve their customers. The recent Libor and Forex fines handed out by regulators suggests there is little evidence of the change in culture being anything other than talk.

With the physical separation of retail from investment banking there is a one off opportunity to actually design and implement the different cultural model that each of these businesses should adopt. The reality is that there is no one culture that fits retail, corporate, private and investment banking. As Treacy and Wiersema wrote in their seminal work on the Value Disciplines it is not possible for organisations to be the leaders in more than one of the three values disciplines – operations effectiveness, customer intimacy and product leadership. Excelling at each one of those value disciplines requires a different cultural model. The current size and complexity of banks has led to a blended culture that has inevitably led to compromise and resulted in excellence at none of them. Ring-fencing provides the opportunity to put this right.

Use the opportunity to replace legacy IT with architecture driven solutions

Much has been written about the failure of the large banks to step up to the challenge from the digital natives due to the complex legacy IT systems. Ring-fencing provides the opportunity to step back, produce and implement the architecture required to deliver the front to back digital experience that customers, both retail and corporate, are demanding. Under the label of ring-fencing this is the opportunity to ditch the legacy systems that were designed for a simpler banking world and that have been twisted and forced to support a multi-segmented banking business. This is the right time to replace them with architecturally driven, agile, cloud-based, channel agnostic solutions that will enable the banks to deliver the experience and services that customers are demanding rather than the ones that the banks are forcing customers to take. The experience that a retail customer is demanding is quite different from the corporate or investment banking customer requires. After all if the banks are going to have to spend between £1.5bn and £2.5bn why not spend this on something better than today rather than just splitting and duplicating today’s systems across those businesses within and outside the ring fence?  

A chance to significantly drive down cost while improving customer experience

Today’s banks have a real challenge with costs. With the additional capital required to be held, the low interest rates and the increased regulation there is no doubt that the cost base for banks need to be dramatically reduced and changed. Ring-fencing provides the opportunity to look at whatthe cost bases of the businesses inside and outside the ring fence should be. This includes looking at which parts of the cost base the bank actually needs to own and which it can outsource to those better able to deliver the service on a more cost effective basis. Outsourcing can not only reduce the costs it can also allow the bank to focus its key resources on the strategic priorities such as digital.  Ring-fencing provides the opportunity to look at the processes from the beginning to the end and to decide which parts of the processes the bank actually needs to own, which parts of the process would be suitable for the application of Robotic Process Automation and which parts of the processes are no longer relevant. This should enable the bank to significantly improve the overall customer experience as well as drive down cost. This is also a chance to strongly embrace the use of analytics and deploy Next Best Action tools. By executing all of these activities cost can, without doubt, be significantly reduced while exponentially improving the customer experience. This means that not only should the additional cost of operating the bank in a post ring-fencing world be reduced significantly from the estimated £1.7-4.4bn annual charge but the banks that get this right will be far better positioned for whatever the world chooses to throw at them.

Ring-fencing is an opportunity to be welcomed

For banks that see the glass half full (rather than half empty) when it comes to ring-fencing who embrace the opportunity to fundamentally re-architect and re-launch their businesses they will emerge from ring-fencing far stronger, far more agile and far more profitable than those banks who resent the regulation and try to do the minimum to comply with it.

Wednesday, 22 April 2015

Why HSBC should relocate its Head Office outside the UK

While the question is usually posed as will HSBC move its headquarters from London the question should be why wouldn’t they?
Though it is continuing a process of reducing its global presence (with the businesses in Brazil  and Turkey likely to be the next two to go), HSBC is still a global business. The UK business, particularly the retail bank) is a decreasingly significant contributor to group profits. The logic of the UK being the largest part of HSBC an
Biggest contributor to UK Bank Levy
HSBC is the largest contributor to the UK Bank tax having paid more than a third of the £2.2bn raised since the levy was introduced. It paid $1.1bn (£750m last year and will pay $1.5bn (£1bn) this year. This is despite having smaller UK operations than the other big 4 banks (RBS, Lloyds, Barclays). This tax has risen seven times since it was first introduced. At that time it was said to be a one-off reparation payment for the role that the banks played in the 2008 financial crisis. However with the unpopularity of the banks (largely driven by the politicians in collusion with the media) the banks have been seen as a soft touch for raising further tax revenues by both Labour and Conservative governments.
Anti-bank sentiment
The Conservatives winning an overall majority in the General Election has not made the argument for remaining head quartered in the UK stronger. It was after all the ‘business friendly’ Conservatives who have just raised the Bank tax once again in the last budget. There is nothing to suggest that they won't raise it further when they need more money to either invest or pay off the deficit.
Time zone argument
One argument that has been made for why it makes sense for HSBC to locate its Head Office in London is because the UK time zone is ideal for both working with Asia (in the UK morning) and the US (in the UK afternoon and evening). However with HSBC shrinking its retail operations in the US, after the disaster that was Household, the need to be in the UK only becomes a necessity for the investment bank. Having the investment bank based in London does not mean that the Head Office has to be.
Ring fencing
A further argument for moving the Head Office out of the UK is ring fencing. Ring fencing is a way to structurally separate retail banking activities from wholesale and investment banking activities. It is due to be implemented by 2019 and is a UK regulation which differs from both the way that the US and the European Union intend to de-risk structurally significant banks. HSBC intends to only put its UK retail bank within the ring fence and the rest of its business outside. It is estimated that ring-fencing will cost banks in the region of £1.5bn - £2.5bn to put in place and then a further £1.7bn - £4.4bn per year to operate. This will be yet another significant rise in the cost of doing banking business in the UK. Since the element inside the ring fence for HSBC will be exclusively UK activities and relatively small, it would make sense, reduce costs and be less disruptive to at the same time as setting up the ring fence move the Head Office out of the UK. Not only would it reduce the overall set up costs (of separation and relocation), but it would also reduce the running costs of operating the ring fenced business.
Welcome back Midland Bank?
Of course once the UK retail bank is separated from the rest of HSBC by means of the ring fence it will not only make it far easier but more obvious for HSBC to sell off the UK retail bank given the inevitable decline in profitability in the UK business brought about by the changes to banking that the UK government (of whatever party or party combination) already plan to and will plan to introduce. HSBC have already announced that its retail bank head office will move to Birmingham in the heart of the Midlands. A cynic might think that the combination of the separated bank and the move to the Midlands will be steps towards the reversal of the 1992 acquisition by Hong Kong-based HSBC of Midland Bank. Good bye HSBC, hello Midland Bank?
Footnote: Should Labour get into government and abolish non-dom status relocating the Head Office back to Hong Kong would resolve that particular problem for HSBC CEO Stuart Sullivan (but of course there are a lot of far cheaper ways to do that!)