Wednesday, 24 April 2013

Will Verde be Co-op's ABN Amro?


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

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

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

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

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

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

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

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

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

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

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

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

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

Update April 24th 2013.

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

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

Monday, 22 April 2013

Are drive thru branches really relevant in the 21st century?

Metro Bank has announced that it will open in May the first drive thru branch in the UK this century. The branch will be alongside a dual carriageway in Slough the town that was the setting for Ricky Gervais' 'The Office'. It will consist of its own dual carriageway - one for ATM and automated deposit services and one for access to a teller for day-to-day transactions.

The UK does not have a history of drive thru bank branches with only three having been recorded - the first in 1959, the second in 1966 and finally one at Hatton Cross near Heathrow Airport in 1998. Given that there has been so little success with drive thru branches in the past the question has to be asked why not and what is different this time?

Most banks  are increasingly trying to drive transactions out of the branches rather than through them encouraging their customers to carry out routine transactions online either through internet or mobile banking. Along with this and the use of cash declining, this  move on Metro Bank's part seems counter intuitve. However Metro Bank was launched on the basis that it did not want to be like other banks.  Vernon Hill, the American founder of Metro Bank, is not someone to follow the herd. Hill grew Commerce Bank, the successful banking business in the US, based on his experience of running McDonald's franchises. He sold TD Bank before coming to the UK and based on that experience launched the first new bank in the UK.

Metro Bank has focussed on providing a different, louder, more US-styled experience for customers with features such as 'magic' coin-counting machines that look like Vegas slot machines, lollipops and free dog biscuits.

Metro Bank proudly does not compete on price but on the customer experience it provides. The launch of the drive thru bank is part of this differentiated experience. It comes ahead of the launch of seven business day switching that all UK banks will need to adhere to from October 2013 and in anticipation of increased competition from other new entrants such as Tesco, Marks & Spencer and Virgin Money.

Banks for many years now have actively attempted to re-purpose branches from transaction processing to retail outlets where the customer is encouraged to spend the time required to open more complex products such as current accounts and mortgages.

The Metro Bank drive thru branches will clearly be servicing not sales centres, however they will be paired with a more traditional branch where sales can be carried out.

However the more recent trend in retail banking is very much towards omni-channel where digital is integrated into the whole customer experience irrelevant of which channel is used. This is where the leading banks are investing. This includes bringing internet and mobile banking into the branches and through digital bringing the contact center operative and the banking advisor into the home or onto the smart phone or tablet.

Tesco another new entrant into full service banking is investing heavily into digital and omni-channel banking prior to its full launch. Metro Bank does have an online banking service but does not major on this or reflect that in their current seventeen branches.

It is unlikely that the launch of drive thru banking is going to be the breakthrough strategy for Metro Bank that takes them from being a small but attention-grabbing player to being a significant threat to the big 5 banks, but it will certainly get them some free publicity.

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.

Thursday, 14 March 2013

How to make it easier to get new entrants into UK Banking

Let your customers through.

There are many complaints from politicians and consumer lobbyists that there is not enough competition in UK banking and in particular that there are not enough new entrants. Whilst seven business day switching will be introduced in September 2013 as discussed in http://www.itsafinancialworld.net/2013/02/why-faster-bank-switching-will-not-turn.html this alone is not enough.

There are five actions that need to be taken together to encourage new entrants into the market and allow them to compete. These are:
  1. Speed up the process of issuing banking licences
  2. Speed up the process of approving executives
  3. Reduce the  initial capital required
  4. Provide low cost access to the payments system
  5. Make current account switching easier
Looking at each of these in turn.

The process of applying for and being granted a banking licence is tortuous, time-consuming and very expensive with no guarantee of success. This alone is putting off banks, particularly where the new entrant is foreign. Without a banking licence new entrants are not able to take deposits a vital source of funding given the costs of wholesale funding. Vernon Hill, founder of  Metro Bank, the UK's most visible new entrant, has said  that if he knew then what he knows now about how difficult it would be to get a UK banking licence he wouldn't have started.

This is a major barrier to entry not only for consumer banking, but also corporate and commercial banking.

The process of approving executives by the FSA is typically taking nine to twelve months. This is not only effecting new entrants but also existing players. Even when an executive of one of the Big 5 banks changes role it is often necessary for them to be re-approved for their new role, which makes it difficult for banks to be agile in changing their organisations, which means that poor performing executives are left in place because it is too difficult to replace them. Whilst an executive is going through the approval process they are not allowed to perform their new role. If an executive was approved for a role in an existing bank they will need to be re-approved for the identical role in a new bank. For new entrants this can cause a significant delay in launching the new bank.

Currently when a new entrant wishes to launch a new bank they will need to present their 5 year plan and put aside  from day 1 the 9% capital that they will require when they achieve their 5 year plan. This clearly represents a significant cost to the new entrant and effectively means that the initial capital may represent not 9% but anywhere up to and over 100% of the assets that they will have by the end of the first year of  operating. Whilst the government has annouced that new entrants will in the future not have to put up the full 9% but rather 4.5% this does not go far enough. What is needed for new entrants is that the capital put aside is allowed to increase in line with the assets that they take on. Whilst the practicalities of doing this real time may be too difficult certainly doing it on a projected year by year with a true up at the end of each year would be a far more reasonable approach.

One of the recognised barriers to entry for new entrants is access to the payments infrastructure, both local and international. The cost of this is seen as prohibitive, but without it they will not be able to offer customers the essential ability to withdraw cash from ATMs, make direct debits and standing orders and international payments. The government has talked about making the payments infrastructure a national utility or forcing the Big 5 banks to offer new entrants low cost entry. This sounds eminently sensible, but it cannot and should not be at an incremental cost to the current volumes that go across the payments infrastructure. The reason for this, just like for traditional utilities such as gas, electricity and water, is that the companies that provide them have invested billions of pounds to build the high performing, resilient infrastructure and need to constantly upgrade and improve that infrastructure and those investments need to be paid for by the users of that infrastructure. So whilst the politicians may say that processing of an ATM transaction can be measured in pence and that that is the price the banks should be charging other banks, a  price based on a fair fully loaded cost, including future investment, needs to be calculated. One way to address this would be to get an independent assessment of the cost of providing and investing in maintaining and upgrading these services. This could a role that the proposed Payments Regulator could play.

Finally, as already mentioned, making current account switching is already in progress and is due to deliver in September 2013.

The combination of these changes, announcements on which have either already been made or will shortly be made, will significantly reduce the barriers to entry for new players into the UK Banking sector, but what are the implications of these changes, have they been thought through sufficiently and will they be enough to shake up competition in banking?

Speeding up the issuing of banking licences should purely be about the efficiency of the FSA and its successor. It should not be about dropping the quality of the testing. It is clearly dependent upon the quality of the submission and this falls at the feet of the applying new entrant.

Simillarly speeding up the approval of executives needs to be about efficiency and re-thinking how this approval process is designed.  The current process is far too bureaucratic. There needs to be a distinction between whether the executive is new to the UK financial services sector, new to the role or simply performing the same role for a different bank. Questions need to be also asked as to whether the examiners know enough about the detail of the role to really evaluate the individual's suitability and fitness to hold the position. The current process requires executives to spend a considerable amount of time preparing answers to questions that go no way to deciding whether this person is fit to perform the role. However speeding up the process should not add risk to the banking sector.

Reducing the initial capital required for a new entrant undoubtedly does increase the risk should the new entrant fail. The question is whether that is an acceptable risk. Northern Rock was a retail business - it had no investment banking business. It was also not a large player. However it failed largely due to irresponsible lending. If Northern Rock had been permitted to hold lower amounts of capital the losses would have been even greater. In the rush to create disruption to the hold of the Big Five banks the regulators must get the balance right between making it easier for new entrants whilst still protecting customers from banks that are not as well established and who's balance sheets are not as well protected from changes in the market. Given the measures being taken to electrify the ring fence between retail and commercial banking that are being enforced on the large banks, the Big 5 banks will continue to be a safer option for customers than the new entrants following the introduction of lower capital requirements being proposed.

Forcing a reduction in the cost to use the payments infrastructure comes with the inherent risk that owning and managing the payments infrastructure will become increasingly unattractive to the current owners which could lead to a lack of investment which in turn could lead to a reduction in the resilience of the infrastructure which would in the long term be bad news for both customers and businesses. After 9/11 it was not the destruction of the Twin Towers that nearly brought the US to its knees, but the closure of the airspace which prevented the movement of cheques, which effectively stopped the payments structure working that was the biggest threat to the US economy. An economy cannot survive without an efficient and resilient payments infrastructure.

Faster switching will only encourage customers to move when there is a significant difference in the customer experience and value for the customer to make it worth their while.

As the government and the regulators look at the measures to create increase the number of new entrants coming into the banking sector rather than rushing these in to get good headlines thorough and considered analysis needs to be conducted to really understand the full implications of lowering the barriers to entry.

In the meantime the lack of competition in the UK banking sector should not be overstated. With the likes of Marks & Spencer, Tesco, Virgin Money, Metro Bank, Handlesbanken and Nationwide there has probably never been a time where there has been as much choice and competition in the sector.

Friday, 1 February 2013

How did Citibank get European retail banking so wrong

According to Reuters Citibank is looking to pull out of consumer banking in a number of countries beyond Pakistan, Paraguay, Romania, Turkey and Uruguay, which they announced in December 2012. The withdrawal is all part of new CEO, Michael Corbat's strategy to get Citibank back into shape.

The reasoning given behind the withdrawals is that these are countries where Citibank has not managed to build sufficent market share to be a significant player or to make sufficient profits from. This is not unlike the argument that 'the world's favourite bank', HSBC has been making for some time (see http://www.itsafinancialworld.net/2011/05/hsbc-goes-back-to-its-roots.html ). However where HSBC has from its beginning been a bank that supports world trade and has successfully leveraged its global brand this is not what Citibank has done with its consumer banking strategy, particularly in Europe, but also across the globe.

When Citibank has entered a European country it has not been part of a joined up global or European strategy, it has been on a country by country basis. It has usually led with either its Citifinance, the finance house brand, or a mix of Citifinance and its mass affluent brands. 

One of the challenges with entering with a finance house brand is that in many markets it tends to attract customers that cannot get a loan from their main bank or they have to compete on price. This has proved to be the case in a number of the countries that Citibank is looking to address.

Citibank with its Citiblue and CitiGold segmentation was aiming to attracted the premier banking segments, but this was in many ways conflicted by leading with the unsecured loan product.

Citibank has tended to enter these markets with a standard offering not tailored to the local market and not recognising the nuances of these markets. In Germany, for instance, the tendancy of customers to have their current account and savings with a local or regional savings bank, meant that Citibank has, to a large extent, ended up with a loans business that is made up of customers that the local German banks would not lend to, resulting in a low quality book. Citibank as long as it wanted to leverage the power of the global brand was never going to be seen as a domestic bank, so in Germany the strategy it adopted was to compete on price and/or availability of lending.

In Spain, one of the most over-banked countries, where it feels like every other high street outlet is a bank branch (or at least until the financial crisis) and where there has been a lot of innovation in branch formats, Citibank opened very standard, unappealing branches. Going to a bank in Spain is often a social event, but the standard design that Citibank chose to deploy meant that from the street visibility into the branch was minimal and far less welcoming than their local rivals. Without branch footfall in Spain it is difficult to compete in consumer banking.

Citibank failed to recognise in Europe that  one of its  brand's greatest strength is its global nature and its payments infrastructure. If Citibank had recognised the entrepreneurial flair of European migrants and the share of their wallets that flows  from and to the home countries, then their market share of consumer and SME banking could have been far higher.  This was an offering many of the local domestic banks which tend to be inter-country regional in their focus could not compete with.

Focusing on the migrant and ex-pat markets could have produced a far more successful result. However in Germany in particular the focus was firmly on the local German and certainly not on the migrant market.

For instance Turkey, one of the countries that Citibank consumer banking is pulling out of, has one of the most vibrant and innovative banking sectors with a young, educated, increasingly affluent population. It also has a large number of  its citizens living in Germany and the UK, many of which are sending money back to Turkey on a regular business. Many of the Turkish living in their adopted countries are successful businessmen ideal targets for the wealth offerings that Citibank is a very strong in. Targeting those Turkish in Germany could have been a very successful model for Citibank, particularly with the receiving bank being Citi.

Equally there are a lot of Pakistanis living and working in the UK and the Middle East with very high levels of remittances going back to Pakistan. There a lot of wealthy Pakistani entrepreneurs investing in a range of industries including real estate and leisure,. Many Pakistanis are well educated and mobile. Again this is a country that Citibank is withdrawing from.

This missed opprtunity is not limited to Europe. In Latin America many Spanish people live and work and with the increasing financial crisis in Spain, whereas it used to be that Latin Americans working in Spain  were sending money back to their home countries the flow of remittances is now going the opposite way from ex-pats back to Spain.

The failure of Citibank to gain market share in consumer banking across the globe is not because these markets are unattractive or too competitive but  it is the failure of Citibank to recognise the value of its global brand, the strengths of its payments infrastructure and its failure to think globally and execute locally. It is an opportunity that others will step into reducing Citibank to a minor player in consumer banking.

Monday, 21 January 2013

Crunch time for Clyne as Santander considers NAB bid


According to the London Sunday Times, Ana Botin, the CEO of Santander UK, is considering a bid for National Australia Bank's UK businesses Yorkshire and Clydesdale banks.

This comes after Santander withdrew from their bid for the Royal Bank of Scotland 316 branches late in 2012 (see http://www.itsafinancialworld.net/2012/11/for-sale-316-bank-branches-must-go-by.html ) giving the reason the state of the RBSG technology.

Santander in the UK is in the awkward position that having received £4.5bn of capital to complete the acquisition from RBSG from Santander Group in Spain and putting it on the UK balance sheet, the FSA has refused to allow the money to be sent back to Spain. This means that Ana Botin needs to decide what to do with it as Santander in the UK has one of the best capital ratios of UK banks.

Acquiring the UK operations of NAB would make a lot of sense for Santander. Yorkshire and Clydesdale banks would bring business banking market share, which aligns with Botin's ambition to grow a strong business banking business in the UK to take on the big four banks. Santander in the UK has a good track record for successfully acquiring and integrating UK banks starting with Abbey National and more recently Alliance & Leicester and Bradford & Bingley. There would be clearly significant costs savings to be had from Yorkshire and Clydesdale both from moving back office operations into Santander centres and from migrating customers onto Santander IT platforms. Santander has already invested in upgrading their systems to handle business banking in anticipation of the RBSG deal going through so this would be one way to get a return on that investment.

Cameron Clyne, the CEO of National Australia has on many occasions made it clear that he does not see the northern hemisphere operations as part of the long term strategy for the bank. Both Yorkshire and Clydesdale have been starved of much needed investment for many years. However Clyne has, up to now, been reluctant to sell the banks for the prices that buyers want to pay, not wanting to realise the inevitable writedown that would be required with the consequential drop in capital on the balance sheet at a time when capital is king.

However Nab is seen to be falling behind its domestic competitors (Westpac, ANZ and Commonwealth Bank) and Cameron Clyne needs to be seen to be doing something to change that position. Analysts in Australia have been calling for him to dispose of the albatrosses that are Yorkshire and Clydesdale banks.

Cameron Clyne may hope that by the story once again running that Santander is interested in Nab that this may start a bidding war with the likes of the resurrected NBNK and JC Flowers looking to ace Santander. However Santander has a reputation for never over-paying for acquisitions, indeed getting bargains as was the case with both Alliance & Leicester and Bradford & Bingley, so Cameron Clyne cannot hope to get a fat price from Ana Botin.

Should Santander get the Clydesdale and Yorkshire banks it will not be good news for most Nab employees in Scotland and Yorkshire since it will largely be the customers and the business banking skills that Santander will be keeping with the rest being discarded.

With both Cameron Clyne and Ana Botin needing to dmeonstrate to their respective markets their leadership it could be very interesting to see over the next few weeks and months whether a deal can be struck.

Friday, 7 December 2012

Commonwealth Bank of Australia run by Amazon?

 

No this isn't the latest bold move on the part of Amazon, acquiring one of Australia's so-called 'Four Pillars', but rather the extensive use of Amazon's cloud services by Commonwealth Bank.

Michael Harte, CIO of Commonwealth Bank of Australia (CBA) has spent the last four years and around AUD$1bn (£650m, $1bn USD) moving to a cloud-based operating model transforming the infrastructure and the way applications are delivered at the bank. This has included a considerable investment in the use of cloud services particularly those provided by Amazon Web Services (AWS). By so doing he has managed to reduce the percentage of the IT budget spent on infrastructure from 75% to 26%.

An example of where this cost reduction comes from is that whilst it used to take eight weeks to stand up a new server and several thousand dollars it now takes, according to Harte, eight minutes and 25 cents to do the same in the cloud. There is also a hugely significant reduction in the amount of energy that the bank directly consumes. No wonder large amounts of cost can be taken out.

Amongst financial services organisations there is a lot of debate about the use of cloud and whether it is safe or appropriate to use. There are some CIOs, such as Barclays European CIO, Anthony Watson, who are skeptical of the hype around the cloud and see it as fundamentally nothing more than large server farms, and there are others who are still in the early stages of deciding what to do about it. CBA and NAB (National Australia Bank) with their approach to virtualising the IT function (see http://www.itsafinancialworld.net/2012/10/do-banks-need-to-be-it-experts.html ) appear to be leading the way in implementing these technologies and  making the fundamental shifts to the IT operating model. However the use of Amazon Web Services by banks is not limited to those in the Southern Hemisphere, both Bank Inter in Spain and Italian bank Unicredito are using Amazon to host applications.

Customers may become concerned about the security of their personal data when they hear of  their banks moving onto the cloud, but Harte and other progressive CIOs are very clear about the fact that customer data will never be put into a public cloud. What this does mean is that the design of how applications and data are put into the cloud is absolutely critical, particularly as increasingly organisations implement cloud-based application such as the CRM solution, salesforce.com. Finding ways of exploiting the richness of functionality and the reduced costs of cloud solutions while leaving customer data firmly secured in the financial institutions private data centre is critical if the confidence and trust of the customer is not to be lost. This is particularly key for banks where the customer trust is at an all time low.

CBA has taken a measured approach to moving towards the cloud operating model starting with using it for development and testing, where no customer data is involved. Before Christmas 2012 CBA will migrate commbank.com.au, the internet banking platform onto Amazon's cloud and then it will be fair to say, with tongue lightly pressed into the cheek that Commonwealth Bank is being run by Amazon.

Thursday, 22 November 2012

A Change of Strategy for Aviva?

The announcement of the appointment of Mark Wilson, the former CEO of the largest Insurance company (excluding China) in Asia, AIA, as CEO of Aviva from January 1st 2013 has been greeted positively by the industry. Mark Wilson, born in New Zealand, has spent most his career in South-East Asia both with AIA and AXA.

John McFarlane, the former CEO of ANZ Bank, will resume his role as Non-Executive Chairman. McFarlane spent most of his career with ANZ Bank and Standard Chartered Bank. At ANZ he set a strategy for the Melbourne-based bank of expanding into South-East Asia and it is today the Australian bank with the largest footprint in Asia. Standard Chartered whilst Head Officed in London has Asia as its biggest market.

Back in November 2010 Andrew Moss, the CEO of Aviva at that time, announced that Aviva was withdrawing from Asia to focus on the mature Western European markets (see http://www.itsafinancialworld.net/2010/11/aviva-to-exit-asia.html ), a move that was seen at the time very much as swimming against the tide as the likes of HSBC and Prudential were rapidly expanding there.

One has only to look at the difference in growth between the Prudential (once the target of a hostile takeover by Aviva, which the then Prudential CEO Mark Woods rapidly rejected) and the Aviva to see who had the better strategy.

The new CEO will inherit a clear strategy that John McFarlane in his time as Executive Chairman has laid out that is focused on the exiting of 16 non-performing business segments, including their US business. With challenges in their Spanish, French and Italian businesses and the increasing demand for capital from new regulation such as Solvency II, in the short term there is little opportunity for Aviva to reverse the exit and rapidly expand in Asia. There is an inherent danger that Aviva could end up following the restructuring, including the inevitable significant write down on exiting or disposing of their US business, becoming effectively a UK only insurance business at a time when the UK insurance sector is looking increasingly unattractive given the impact of RDR (the Retail Distribution Review legislation) and the slow growth in the economy.

However it is highly unlikely that an executive of Mark Wilson's calibre would have taken the role at Aviva to run a UK only business. With Wilson's track record of transforming AIA and the combined Asian experience that the Chairman and the Chief Executive have there is little doubt that they will both be looking East for the future growth of Aviva.

Tuesday, 13 November 2012

For Sale: 316 bank branches must go by end of 2013



In June 2010 it was announced that Santander was to buy the branches. Having made the offer, £1.65bn, and completed the local searches (regulatory approval)  when the surveyor's reports came back Santander decided that the RBSG technology estate was in too bad a state (or at least that's the reason they gave) and rather than negotiating a large discount walked away from the deal.

This leaves RBSG in an awkward position. They have just over twelve months to sell or float the branches. Hardly the strongest negotiation position for a seller to be in.

What will any potential buyer get? 1.8m customers, £21.7bn of deposits and 316  branches (2 of the original 318 mysteriously seem to have disappeared - possibly they were in Brigadoon), 240,000 small business accounts and 1,200 corporate banking relationships. This is the equivalent of 5% of the business banking market.

Why would anyone want to buy this business?

SME account customers on average have higher levels of deposits, have higher levels of personal account activity and are more profitable than other customers. They are also more inclined to use branches and want face-to-face contact. Traditionallly this has been a hard sector for new entrants as the Big Four (Barclays , Lloyds Banking Group, RBS/Natwest and HSBC) have dominated the sector and persuading customers to switch (because they have complex relations with their bank) has been difficult. Building an SME banking business from the ground up by encouraging customers to switch from their existing bank is a long slow process as Santander is finding. Therefore for an organisation wishing to enter the market or an existing player wishing to significantly expand their market share this should be highly attractive.

With bank valuations at very low levels, the example of what Cooperative finally got Lloyds Banking Group to settle for and the fixed timescales by which RBSG must agree a deal, this should be a buyer's market and the ability to get the branches for a snip is there. Whilst in 2010 Santander agreed to pay £1.65bn the expectations are that now this deal will be made at around £650m.

Who are the potential buyers?

None of the remaining three of the Big Five banks, Lloyds Banking Group, HSBC or Barclays, even if they wanted to, will be allowed to bid for the business on the grounds of their current market share.

Whilst Virgin Money was in the original competition for the branches, having subsequently bought the 'good bank' elements of Northern Rock, and having expressed initial renewed interest when Santander walked away from the deal, Virgin have effectively rules themselves out. Sir Richard Branson has said that organic growth makes more sense for Virgin Money at this time. Having had to raise large amounts of capital to fund the Northern Rock acuisition it would be very difficult for Virgin to return to the markets and raise even more capital to acquire the RBSG assets. Given the complexity of the integration project for Northern Rock underway it is not all surprising that Virgin has politely withdrawn from the sales process.

Next most often mentioned is Nationwide Building Society. With a track record of growing by the successful acquisition and integration of building societies (Anglian, Portman, Chesire, Derbyshire, Dunfermline to name a few) and positioning itself as different from the banks - more customer friendly and not tarred with all the scandals associated with the Big Five, Nationwide would be welcomed by many as a challenger in the SME banking market. As a mutual going to the markets to raise the large amount of capital could be a significant challenge, but The Cooperative was able to overcome this to acquire the Verde branches from Lloyds Banking Group, not least of all by getting the price significantly reduced.  A factor that may put Nationwide off the deal is the 1,200 corporate banking relationships. This is not a sector that Nationwide currently plays in. Whereas SME banking is often linked quite closely to retail banking and can share a common banking platform, corporate banking is quite different not only in the technology but also in the skills required from the staff.

Nationwide does have the advantage over other potential purchasers that it has spent the last few years investing heavily in a modern core banking system (SAP) which should make migration of the acquisition onto the new platform easier than for Santander. However the new platform isn't finished or fully proven yet, so there would have to be a quite lengthy period where Nationwide would be dependent upon RBS's platform.

JC Flowers, the private equity firm, is also seen as a contender. Having created its One Savings Bank vehicle from the acquisition of Kent Reliance Building Society and having put aside a £1.5bn treasure chest to acquire mortgage books, this money could be re-directed towards the RBSG branches. However the One Savings Bank vehicle is a very small operation and would need to be reversed into the far larger RBSG assets. Neither One Savings Bank or RBSG have modern IT platforms to run the business on so there would need to be a significant investment to make the business a real contender. Going for the SME banking business as the first serious entry into the UK banking market would also raise the risk for JC Flowers. What could be interesting to see is whether JC Flowers could negotiate for a different mix of the branches and customers more towards personal customers and mortgages to make it more attractive to them.

AnaCap Financial Partners LLP, a private-equity backer of Aldermore Bank Plc is also rumoured to be interested. AnaCap has partnered with Blackstone, the world's largest Private Equity firm, to buy banking and insurance assets. Aldermore Bank does not have any branches but still has assets of around £2bn. AnaCap and Blackstone having access to the capital to make this deal happen, however the shape of the deal would potentially be to back an MBO or floatation and to acquire the RBS IT platforms to run it. The question would have to be, given the IT problems that RBSG has had recently, what level of further investment in IT would need to be made to create a true challenger in the SME  and corporate banking markets?

Another private equity firm that could be interested is Corsair Capital where Lord Davies, the former CEO of Standard Chartered, is a partner and vice-chairman. There is no doubt that his experience would bring credibility to a bid, just as Gary Hoffman's presence lent credibility to the NBNK bid for the Lloyds Banking Group Verde branches. This would be very important as getting Bank of England approval for  the executive team of whoever acquires the business is going to be absolutely critical to the success of any bid.

On paper these assets could be attractive to National Australia who with their Clydesdale and Yorkshire Banks do have a significant focus on the SME sector and where there could be synergies. However the UK is not strategic for NAB and there is significant pressure on Cameron Clyne, the CEO of NAB, to dispose of his UK assets even at the cost of a significant writedown. If he were allowed to or wanted to take a longer term view then acquiring the RBSG assets and combining them with Clydesdale and Yorkshire Banks with a view to then selling them could be a way of getting a better return.

Handelsbanken has been making very success in roads into the UK SME banking market with over 150 branches and both high profitability and customer satisfaction. Whilst the addition of  316 branches would significantly increase their scale their preferred approach is grow organically so it is highly unlikely that they will enter the sales process.

Looking at other foreign players who might want to enter the UK banking market the European banks have their hands full in their domestic markets and closing their operations in the troubled European economies such as Italy, Spain, Portugal and Greece, so it is highly unlikely that one of them will enter the fray.

A long shot could be one of the Russian banks such as B&N Bank, Sberbank or VTB. They have the capital and the interest in expanding beyond Russia, but this would have to be a long shot.

Looking at the timescales, the integration challenges and the potential buyers the most likely outcome is a flotation or a management buyout of some form. RBSG needs to go through this process whether it is the final outcome or not as it is important for any potential buyer to believe that there is a competitive bidding process in order to protect the price that RBSG and ultimately the UK tax payer gets for these assets. Whilst Stephen Hester,  the Chief Executive of RBSG, sees the disposal of these branches as a 'distraction' and representing only 2% of RBSG it should be an interesting twelve months.

Update February 3rd 2013: According to Britain's Sunday Telegraph an IPO is now increasingly likely as no one has made a serious offer for the branches. Potential bidders have no been helped by a significant rise in the value of banks in the last few weeks. Whilst it is now most likely that a float will be the outcome, don't assume that this is not an elaborate ploy to force the hand of a potential bidder.

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Friday, 9 November 2012

Are the regulators being realistic about Retail Banking?

Andy Haldane, the Executive Director for Financial Stability told a UK Parliamentary Commission on Banking that the UK banks should create a common technology platform for Retail Banking that would act as a public utility and spur further competition in the sector. This he said would make it easier for customers to swap banks and make it easier for both new banks and existing ones that are currently held back by "antiquated" technology.

The theory would be that all the customer bank accounts along with their numbers could be on a common system so that when a customer wanted to change their bank they wouldn't have to change their bank account number all they would need to do is have that account number point to a different bank. Instant switching with no hassle, no direct debits going missing, no standing orders not paid, no missing salary payments - what more could customers want?

The underlying premise behind Mr Haldane's proposal is that retail banking is an undifferentiated commodity  service and that therefore having an industry common platform makes sense since the only basis of competition is price. Whilst it could be argued that retail payments processing is an undifferentiated service e.g. the transmission of payments using the Faster Payments scheme is standard for all the banks, is that really true for all aspects of retail banking? Certainly Svenska Handelsbanken could successfully argue that the customer centric, branch-based banking service that they operate is very different from the Big 5 banks and is reflected in their success in winning customers from the other banks. The ability of their branch managers to make lending decisions without referral to head office is clearly a differentiator. Equally First Direct customers would argue that the service that they receive from their bank is quite different to that from other banks.

To counter this it could be argued that competing banks could still differentiate their service by overlaying a different customer experience over the top of a common utility platform which would hold all the customer accounts. However the fundamental question is how practical would it be to build a common utility platform?

As Mr Haldane argues the incumbant banks have 'antiquated' systems. This has been very publicly seen by the recent problems that RBS has had. It has also been stated as the reason that Santander walked away from the acquisition of the 316 branches that RBS is compelled to sell.  For a long time it has been obvious that the banks need to replace their core systems in order to keep up with the demands of customers for real time, mobile, digitally enabled experiences. Despite this none of the UK banks has embarked on a wholesale change of their core banking systems. Why? Because replacing the core banking systems is like a full heart, lungs and liver transplant where every vein and artery has to be individually unpicked.

Lloyds Banking Group spent just under £4bn to migrate HBOS onto the Lloyds TSB platform. This was the cost of bringing two banks together onto one of those 'antiquated' systems that Mr Haldane referred to. It has now spent a further £660m on simplifying the systems with more to come.

Commonwealth Bank of Australia has to date spent Au$4bn (£2.6bn) on replacing its core banking platform. That was one bank that is smaller and less complex than any of the UK Big 5.

Even if it was feasible to get the Big 5 banks to agree the specification for a common retail banking platform the cost including migration would be measured in tens of billions of pounds and would take a minimum of 5 years to implement.

The parallels with the NHS IT project where all the NHS records were to be on one system which could be instantly accessible whichever hospital or doctor wherever in the country a patient is are uncanny. The NHS IT programme cost over £6bn. Effectively nothing has been implemented and the programme is seen as an abject failure.

The British Bankers' Association (BBA) responded to Mr Haldane's suggestion by pointing out that the banks have committed up to £850m to produce a system that will make switching bank accounts far easier. This has been underway for some time. This will operate more like a mail redirection service. Clearly this is a far lower cost and far more practical approach than Mr Haldane's proposal.

What is concerning is that such impractical recommendations are coming from such a senior executive with the responsibility for ensuring financial stability. It raises the fundamental question of whether the regulator has taken sufficient time to understand the reality of the current state of retail banking.  This is particularly concerning since this is not a one off. The Bank of England governor-designate, Mark Carney, has, according to the FT,  said of Mr Haldane's views on simpler regulation as 'not supported by a proper understanding of the facts', this doesn't bode well for Mr Haldane's future at the Bank.