Monday, 16 April 2012

Is NBNK drinking at The Last Chance Saloon?



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

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

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

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

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

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

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

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

Tuesday, 20 March 2012

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



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

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

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

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

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

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

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

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

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

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

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

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

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

Monday, 12 March 2012

Why the culture of banks has to change



With the FSA (Financial Services Authority) report on what went wrong at HBOS (Halifax Bank of Scotland) before the bank had to be rescued by the UK Government and Lloyds TSB clearly showing that the issue was one of governance, there has never been a time when the need to change the culture of the banks has been clearer or more urgent.

The FSA report demonstrates that the corporate lending division of HBOS had a far riskier book than any of the other UK banks. HBOS continued to win deals in both the commercial and retail property markets in the UK, Ireland and Australia at lower margins and higher risks at a time when all the other banks were reducing their exposure to the sector or no longer pursuing new business. HBOS proudly proclaimed their success and growth in the market, not recognising that they alone were doing this. It doesn't appear to have crossed the minds of the executive that they were winning business that no one else wanted, or at least no one wanted at the rates that HBOS were offering. When the Head of the division proposed a growth of 10-12% in commercial lending not only was this not challenged he was told by the CEO of HBOS that this needed to be increased to 22%.

How could this situation have arisen?

The CEO of HBOS, Andy Hornby, had arrived at HBOS triumphantly from ASDA, part of the Walmart Group. With no background in Financial Services but having graduated top of his course at Harvard and having had a successful career with the strategy consultancy, Boston Consulting Group prior to ASDA, he was seen as the person who would shake up the sleepy financial services industry. He surrounded himself with people who agreed with his position. Those who didn't agree with him got short shrift. Benny Higgins (currently CEO of Tesco Financial Services), had joined from RBS, where he had had a very successful career, to lead the HBOS retail banking business. He left after only a very short while when he fell out with Andy Hornby over strategy.

What this meant was that no one was there to challenge the strategy and the decisions that the CEO of HBOS was taking. Not dissimilar to the situation that was described in the recent report on what went wrong with the corporate governance at RBSG under the leadership of Fred Goodwin.

It is undoubtedly for this reason that the FSA is asking for a change at the Co-operative if they wish to push ahead with the acquisition of the Verde branches from Lloyds Banking Group. The FSA are insisting that the board of the Co-op must have much more experience of Financial Services and be able to challenge the executive leadership of Co-operative Financial Services. This could be such a significant challenge for the Co-op to make them question whether they will continue to pursue the deal. Finding people who the FSA will approve to run or sit on the board of a bank is increasingly difficult. It took Tesco over two and half years to get approval to set up their bank. The FSA has an increasingly large backlog of people to be approved to work in senior roles for banks and it now takes months to get approvals for an individual, even if that individual has already been approved for a similar role at the bank or a rival bank. Such a delay in being able to pushed forward with Verde could make the deal so unattractive to the Co-op that they walk away from it. However given what went on at HBOS and RBSG it is not difficult to understand why the FSA is pushing for this.

The culture of banks where the CEO's and other executives' words are final and unchallengeable is not something new and has always been dangerous.

A recent example of this is the fine raised on RBSG for complaints. The fine was not for the poor service that RBSG was giving its customers but for the fact that the complaints received were modifed by staff before being submitted to the Banking Ombudsman. The reason given being that the staff were afraid of the consequences for their careers of the complaints being upheld. What does this say about the culture at RBSG today, many years after Fred Goodwin left?

A further example that illustrates why the culture needs to change is that of the misselling of PPI (Payment Protection Insurance). It was known throughout the banking industry that both personal loans and mortgages were being sold at prices below cost and subsidised by the excessively high margins on PPI policies, which were very hard to claim on. Yet because it was so profitable no one spoke out and the number of PPI policies that were sold grew exponentially. Why did no one speak out? Surely the hierarchical, command and control culture of the banks has to be key to this along with the pursuit of short term profits at the cost of the customer.

The £8.75m fine imposed on Coutts, owned by RBSG, for not putting in adequate measures to ensure that the money-laundering wasn't taking place or that they were doing business with PEPS (Politically Exposed Persons). One of the reasons cited by the FSA for this behaviour was that staff were incentivised to add additional customers and balances with no measure about the quality of the balances or the customers, is yet more evidence for the need for a fundamental shift in the culture enforced by alignment of incentives with the values that the banks should be upholding.

Without a fundamental change to the culture of banks, where both independent, experienced voices are listended to and encouraged to challenge the exexcutive of banks and with CEOs and senior executives who encourage their staff to challenge their thinking without fear of reprisals then another HBOS, PPI misselling or the latest misselling of derivatives to SMEs is inevitable.

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, http://www.itsafinancialworld.net/2012/01/trickle-becomes-flood-as-bankers-leave.html , 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 http://www.itsafinancialworld.net/2012/01/customers-love-banks-who-charge-them.html ). 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 http://www.itsafinancialworld.net/2011/05/hsbc-goes-back-to-its-roots.html), 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 (http://www.itsafinancialworld.net/2011/08/hsbc-withdrawing-from-us-retail-another.html) Russia (http://www.itsafinancialworld.net/2011/04/hsbc-to-quit-russian-retail-banking.html) 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.