Thursday, 23 February 2012

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

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

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

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

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

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

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

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

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

Friday, 17 February 2012

Who said branch banking was dead?

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

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

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

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

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

Wednesday, 8 February 2012

Third time lucky for NBNK?

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

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

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

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

Tuesday, 7 February 2012

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Monday, 30 January 2012

The World is more than enough for western banks and insurers

The World's Favourite Bank, HSBC, continues its retreat back to its roots (see, with the annoucment of its withdrawal from Central America by selling its businesses in Costa Rica, El Salvador and Honduras to Colombian banking group Banco Davivienda. This comes on back of its withdrawal from retail banking in the US ( Russia ( Chile, Hungary and South Korea. It has now also announced that it is selling its Thai business to Bank of Ayudhya.

This fundamental shift in strategy by HSBC announced last year by Stuart Gulliver represents a general trend across the Financial Services sector away from world domination or 'everything everywhere'  to a strategy far more spreadsheet driven, where decisions are taken on the basis of whether  in a particularly country a dominant market position can be taken and, if not, either not entering or withdrawing if already there. HSBC is not alone in this, Aviva has announced the sale of its operations in the Czech Republic, Romania and Hungary to Met Life.

How much of these strategies are driven by the need to rebuild balance sheets following the financial crash and the imposition of regulations, such as Basel III, Solvency II and the UK's Independent Commission on Banking Report,  requiring far higher levels of capital to be held, or the need to meet shareholder's short term needs for a return on capital versus a lack of pioneering, entrepreneurial, long-term vision will only become clear in retrospect. Is it yet a further sign of the decline of the mature western economies? It  certainly not the strategy being adopted by the emerging economies such as China with its long term investments into Africa, or even Australia with the likes of ANZ making strategic investments into Asia.

The latest announcement from HSBC will certainly not be its last. The ramifications of the financial crisis continue to reverberate across the globe.

Tuesday, 24 January 2012

Transaction Tax 'will send a signal' says EU Commissioner Barnier

Michel Barnier, the silver-haired Frenchman, spoke to The City in the ancient Guildhall in London. This talk, he will have known, was not to a friendly audience. Like so many of his fellow countrymen's leaders, the talk took the form of an academic lecture with the audience being students who really didn't understand the importance and the point of what he was saying. Very early on in his talk he nailed his flag to the mast with the statement that monetary union without economic union isn't possible and that the EU had come to that conclusion ten years too late. (It was just a shame that the proponents of european monetary union hadn't been listening to the many economists who at the time had said that to bring together countries into a single currency where their economies were developing at different paces was madness. You didn't need to have a Ph.D in economics to work that out!).

Platitudes were said to calm the hostile crowd - the UK needs to be in the heart of Europe/Europe needs the UK and the UK needs Europe. He even went as far to say 'There is no plot to undermine the City'.

On the question of David Cameron's veto Monsieur Barnier was quite clear. If there was an exception made to protect the Financial Services sector, then another country would be asking for an exception to protect the automotive or mining or tourism. Strangely he didn't mention agriculture.There could be no exceptions - there could be only one rule book.

His initial argument, during his lecture and before questions, for the Financial Transaction tax was that the banks had required state bailouts and that therefore the banks should pay for having those bailouts. He did not acknowledge that most of the banks that received state bail outs will not actually pay the FT tax and that most of the banks that will pay the FT tax did not receive state bail outs. Indeed over 70% of the FT tax will be paid by UK-based banks and with the French looking to exclude the tax on their bonds this percentage could rise even further. In a revealing Freudian slip, Monsieur Barnier stated that the FT tax will be imposed on the UK against its will. At the end of his lecture, realising what he had said and before questions he hastily re-stated that the FT tax will NOT be imposed on the UK against its will.

During the question and answer session he abandoned this argument when he had been challenged by a questionner that there was an industry that had received state bail outs for the last forty years and would he now introduce an agriculture tax? Needless to say this question was ducked and he complained why whenever he came to London did the question of agriculture always come up? (It couldn't be anything to do with Britain being the major contributor to the Common Agriculture Policy could it?). His argument first shifted to the point that a transactions tax was not novel, that Hong Kong had one (and much lower other taxes) and the US had one too. He also argued that France, Spain and Germany were strongly supportive of the tax (well they would be as they will hardly pay any). In a final act of desperation he argued that public opinion was that bankers were paid too much and that this opinion was the driving force for the tax and that this 'modest tax' (even more modest when you don't have to pay it and your competitors do) should be seen as sending a signal to the bankers.

With that, students educated, the EU Commissioner left The Guildhall to go to his next important meeting.

Tuesday, 17 January 2012

Customers love the banks who charge them the most!

In a very interesting study by the consumer magazine Which? it turns out that the two most expensive financial services organisations to have an overdraft with are First Direct and Nationwide Building Society. These two organisations also have the distinction to have two of the highest customer satisfaction and customer advocacy scores amongst all the banks. Two conclusions could be drawn from this. Firstly that customers want more than anything to have good service and that they are prepared to pay for it. This would be good news for the banks and particularly the alternatives to the Big Five such as Virgin Money and Metro Bank who want to differentiate themselves on customer service, as it would be yet another proof point that good customer service can lead to higher profits. The other conclusion, and the one that Which? draws to is that most customers don't understand the fees that the bank charges them and therefore don't have a basis to compare fees between banks. Or simply that they don't care.

The Which? report comes on the back of a study by PwC into digital banking that comes to the conclusion that customers will be prepared to pay for digital services and that digital banking will becoming the dominant way that customers bank by 2015. Whilst this may be the case, as less and less customers use branches and less frequently the cost of branch banking will soar. This will either result in significant branch closures and the pressure to introduce differentiated pricing significantly increase, whereby the cost of banking in the branch will become higher than online. This will naturally impact those least able to afford it. Of course the banks have tried this before with the brave trying to introduce charges for using a teller, but rapidly withdrawing this when the competition didn't follow suit. However with the introduction of new regulation, the requirement to hold greater levels of capital and increasing demand from consumer groups, such as Which?, for greater transparency around banking fees inevitably the days of so-called 'free' banking are numbered.

Monday, 9 January 2012

Trickle becomes flood as bankers leave the UK industry

What started as a trickle of banking and financial services executives choosing to leave the UK Banking industry has become a flood over 2011. Whilst many of the public and bank-haters may think that this should be the subject of rejoicing, there has been a very serious loss of talent and many years of experience that has left the UK banking industry or gone abroad. The list of retail banking executives who have exited UK banking include:

(see )

There has also been a flood of Banking IT executives who have chosen a different career or a different geoegraphy. The list includes:
  • Gavin Michael - Retail CIO at Lloyds Banking Group who left to join Accenture on the West Coast
  • Ann Weatherston - CIO at Bank of Ireland moved to Melbourne to take up a similar role with ANZ
  • Jayne Opperman - Retail CIO at Lloyds Banking Group moved to Melbourne in a CIO role at ANZ
  • Clive Whincup - Service Delivery Director at Lloyds Banking Group moved to Westpac in Australia to take up a CIO role
In addition there are also the likes of Marion King, CEO of VocaLink (the banking payments processor) who has also left the Financial Services industry.

Such a wave of departures, particularly of so many women, can hardly be good for the UK Financial Industry. It also raises the question of why so many people would take such a big step ( a number of them deciding to move halfway round the world)? Certainly the likes of Vince Cable have rallied the public to despise bankers and made it increasingly unattractive to work for a bank through both financial penalties and through continual attacks on their integrity. The increases in the tax regime has also meant that countries such as Australia, where traditionally the tax system was, at best, comparable to the UK, has now become far more attractive. Along with the Four Pillars in Australia remaining independent of government ownership and growing profitably there are many reasons for executives wanting to go to Australia.

The tax regimes and the growing banking sectors in Singapore and Hong Kong make these cities even more attractive to bankers who want to get on with the job of providing banking services to customers without unnecessary scrutiny and raiding of the wallet by governments.

It is highly likely that this won't be the end of the exodus from the industry. The implementation of the ICB recommendations will continue to make the UK banking industry an unattractive place to work, particularly for those with the freedom to work elsewhere. This can only be good for other countries and will, in the long term, cost the UK financial services sector dearly.

Tuesday, 20 December 2011

Is the Northern Rock decision good for banking?

With the recent announcements that Northern Rock is to be sold to Virgin Money is this decision good for banking and good for the consumers?

The decision, from the Government's perspective, is not only about recouping some of their investment (not as much as they would have liked), but also about increasing competition in the retail banking sector.

Whilst the National Audit Office has launched a "value-for-money" study into the sale of Northern Rock to Virgin Money, this will not halt the sale. Virgin Money will take the keys to Northern Rock at the beginning of January. We have to begrudgingly admire the move  by the serial entrepreneur and self-promoter, Sir Richard Branson, that once again he gets all the credit and press attention for a deal but actually puts little of his own funding into the deal and will rapidly get his money back when he gets access to the excess capital in Northern Rock.

Putting aside the potential bargain that Northern Rock represents for Virgin Money, what is its potential for shaking up the retail financial services market?

With the branding and the products that make up the Virgin Group the potential for Virgin Money to disrupt the retail banking market are high - certainly a lot higher than the other players who looked at purchasing Northern Rock. The continued convergence of telecommunications and banking driven by the consumer demand for mobility, combined with the increase in gaming and  the expectation of entertainment, Virgin Money has the opportunity to present a real alternative to the much discredited high street banks. Appealing to a younger, more tech-savvy customer base, the future high earners Virgin Money could have a long term impact on the profitability and growth of the traditional high street banks. By creating a physical presence on the high street, something Virgin Money has not had to date, this will allow it to move into financial products where customers still need the reassurance of the face-to-face experience to purchase, but doing it in a physical outlet that reflects the Virgin brand. Whilst the banks have tried to provide a new branch experience they have always been held back, and will continue to do so, by their brand and what it represents.

Of course whether Virgin Money lives up to this potential is down to the execution of the integration with  and transformation of Northern Rock and this shouldn't be underestimated. But Virgin Money finally has the opportunity with this deal to do what it has always set out to do and that is be a real consumer-centric alternative to the high street banks.

Thursday, 24 November 2011

Wanted: CEO for UK Retail Bank

With the news that the RBS Retail Bank CEO, Brian Hartzer is to return to his native Australia to take up a similar role with Westpac and to be groomed as Gail Kelly's replacement, he is but just one more executive to leave UK Retail Banking. He follows Deanne Oppenheimer (Barclays returning to her native Seattle - see ), Helen Weir (Lloyds Banking Group - left when Antonio Horta-Osorio joined as CEO), Lynne Peacock (NAB), Joy Griffiths (Lloyds Banking Group - left retail banking to become CEO of Experian Analytics - see ) and Andy Hornby (HBoS - though whether this was a loss for Retail Banking is far less apparent).

Without resorting to the over-used Oscar Wilde quote, to lose this many Retail Banking CEOs does not look to be just chance. What is it that is driving these talented executives to leave UK Retail Banking?

Certainly retail banking in the UK is becoming one of the most heavily scrutinised and regulated banking sectors anywhere in the world. This is leading to executives spending more and more of their time talking to regulators and politicians rather than spending their time on running their business. The ability for talented executives to make a difference, to reinvent the industry and to service their customers in a way that they deserve to be treated is becoming increasingly difficult.

The leadership of the banks is also changing. Whereas the likes of Lloyds TSB, Barclays and HSBC used to be led by executives, such as Sir Brian Pitman, who had risen through the ranks of retail banking and understood the industry, the UK banks are now all led by former investment bankers, who are not passionate about retail banking, for whom serving the consumer and the small business is not second nature and whose vision for their banks is articulated in terms of aggressive ROI targets, which leaves the traditional retail banking executive spending large proportions of their time educating and managing their bosses about the business of retail banking rather than being able to focus on their customers.

It is also true to say that not many people nowadays would want to admit at social events that they are a banker, not if they don't want to end up on their own for the evening! The prolonged pillorying of bankers undoubtedly has an impact on individuals however thick-skinned they may be. In other geographies the role of the banker is far more respected and prestigious.
For the ex-pats who have joined the UK banking sector, and even for many British citizens, the changes in the bonus systems and the introduction of the 50% income tax band have all made the UK a far less attractive place to work and therefore, where there is a choice, moving abroad or back home can be very attractive. Whilst only a few years ago the tax regime in Australia appeared to be more onerous than the UK that situation has been reversed and for both Brian Hartzer and, even more so for Deanne Oppenheimer, going home has significant financial advantages.

Brian Hartzer isn't going to be leaving RBS for a while but who are the potential candidates to replace him? Already the speculation has started.  Will a UK-based candidate be found? Could we see the return of Mark Fisher from Lloyds Banking Group back to Edinburgh? It is very unlikely that we will see the return of Helen Weir, Lynne Peacock, Deanne Oppenheimer or Joy Griffths. Of the up and coming executives Nigel Hinshelwood, COO of HSBC UK, must be in the running, but given the nationalised, increasingly UK-focused nature of RBS would that be an attractive option?

Given that any UK-based executive knows what the UK retail banking market has become maybe the easiest option for RBS is to look abroad and for their next Retail Banking CEO.