The Financial Services Club's Blog

The World's Top 20 Banks 1994-2010 ... Anglo-American Banking Rules!

I’ve just received this month’s Banker magazine which the editor, Brian Caplen, describes as their most important issue of the year as it covers the latest Bank 1000 listings.

This year’s listings show a surprisingly stable crew of American and British banks.

World   Bank                               Tier One              Pre-tax
Rank                                            Capital                profit
                                                      $m                    $m
1        Bank of America Corp        160,387.77           4,360.00
2        JP Morgan Chase & Co       132,971.00         16,143.00
3        Citigroup                          127,034.00          -8,445.00
4        Royal Bank of Scotland       123,859.00          -4,366.29
5        HSBC Holdings                   122,157.00           7,079.00

Considering the crisis was meant to have killed these banks, you may find it surprising to see that Citigroup and RBS have maintained their leading positions.

This is down to the fact that the Banker measures a bank’s strength by its Tier 1 Capital, and so their positioning is more of a reflection of the sheer size of these firms than by their brand or market capitalisation, which is used in some other studies of size.

The Banker’s data is fascinating though, as the database also contains profitability, revenue, cost-income ratio and more, so it’s a useful tool in all senses.  And the online data goes back to 1996, so you can do some useful comparisons.

Mind you, my data - old Banker magazines - goes back even further so I quickly took a snapshot of a few useful year’s – 1994, 1999, 2004, 2008 and 2010 – to see how things have changed.  Mapping out the Top 20 banks of the world for each year makes for an interesting picture (doubleclick the picture to see a larger version):

Back in 1994, Japan ruled the world.

Then their economy went South and Origami Bank folded, Sumo Bank went belly up, Bonsai Bank cut back their branches and something fishy went on at Sushi Bank where staff got a raw deal.

Post-Japan’s slump, the Anglo-American financial system ruled. So you would think that, as that system failed, it also would have gone South.

Not the case.

Maybe that’s a reflection of the sheer scale of investment American and European firms have put into these economies to avoid such a crash.

Well worth spending time looking at the data and looking forward to playing around with it further.

Bank histories reflecting our histories

After looking at the future of banking yesterday, it’s time to look at the history of banking today. Not in depth, that would be dull but, being a sad banking nerdo, I’ve got loads of history books about money and banks in my office.

One of my recent favourites came from the British Museum, and is all about the history of London.  The reason I like it is that it has all these facsimiles of original documents inside, such as this gorgeous South Sea Company Share Certificate from 1759 ...

... you may think it’s not worth the paper it’s written on, which it isn’t, as the £200 invested by Anne Loubert would be the equivalent of £27,000 today.  And it all went up in smoke, when the South Sea Bubble burst.

Poor old Anne Loubert.

Or there’s this old cheque from 1764 drawn on Coutts Bank ...

... one of Britain’s oldest banks, the Queen’s Bank, and part of Royal Bank of Scotland today (really interesting news story on RBS Coutts at Bloomberg if interested).

So why all the history today?

‘Cos I recently had a visit to the HSBC archives.

HSBC’s archives are in a run-down converted hospital barracks from the 1950s in the East End of London, in a shared building with Iron Mountain Storage Company.

Through dark and dank corridors you walk into a little room where Tina Staples heads up the archive, with two colleagues who run the place.

 

Behind scenes are filing cabinets, folders, books, double entry records, papers and more documenting the history of the bank from the 1700s through to today, and its visited by lots of people from researchers to descendants of HSBC's managers and staff through the years.

A living and breathing history of society in fact.

The folks who manage the archives are all professional archivists, and the documents held there are fascinating.

Some of my favourite stories were of the Russian branch of HSBC for example. The London City & Midland Bank office, now HSBC, opened its first branch in Petrograd in 1917 ... and closed it in 1918 after the Revolution.  Even so, the manager toiled onwards to try to look after his wealthy clients. For example, here are the details of the holdings of Princess Anna Soltykoff through to June 1919.

The office had to close down then, as the manager feared for his life, and the story is that he trailed through Russia across Sweden with all of his records, in order to get back to blighty with his and the bank’s reputation intact.

Or there’s the story of the Imperial Bank of Persia, created by Baron Julius de Reuter. Baron Julius also founded Reuters news agency and, in 1889, received a sixty year licence to open the bank at the request of the Shah of Persia, now Iran.

In 1959, the bank was called The British Bank of the Middle East and was acquired by HSBC.

There are lots of other stories in the archives, which makes for a grand visit, and I’m sure I’ll come back to some of the stories from the archives later.

In the meantime, does anyone know what this is?

Answer on Monday.

So not PC but ...

This is so politically incorrect that I almost didn't post it ... but then I did to show how cultures are different and sensitivities are not the same.

As I left Singapore, I saw this and felt quite offended:

Yet Singaporeans are desperate to avoid offending foreign visitors, as are most Asian countries, so how could I be offended?

Well, look more closely ...

I'm sure that my Western colleagues will get the point.

No wonder, following on from Damian Glendinning's points raised earlier, that we don't always agree:

• SAMBO (Singapore): a building company
• SAMBO (UK and USA): a racial slur

But then we arrive in Asia and handout business cards with one hand and immediately put a received business card in our pocket without reading it. 

In Asia, the protocol is that we should offer the business card to the receiver as a gift, with the upper top corners held in each hand so that the card is presented the right way round to be readable.  Similarly we should take their card with honour, and read the details of title properly before putting the card away.

These nuances of societies are brilliantly described in Richard Lewis's book, When Culture Collide, and have been used in HSBC's advertising to great effect for the past eight years.

It was 2002 when this ad first aired ...

... and it's true.

When global, think local, so I wasn't offended after all, as the meaning of the word is not intended.

Now, who was it called me ****** just now?

China will be world's largest economy by 2035

So I’m hiding out this week in Singapore at the Eurofinance Cash, Treasury and Risk show for Asia.

I love this conference as you get here and see the sponsor’s names – HSBC, JPMorgan, RBS, Deutsche Bank, Standard Chartered and Bank of America Merrill Lynch.

There ya’ go, you just know it’s gonna be a rich week of food, entertainment, wine and song. None of that cheapskate IT show stuff, where everything has to be managed on a teensy-weeny small budget. No, this is way beyond the small budget syndrome so I know it’s gonna be fun.

It’s also gonna be fun because it’s in Singapore, a place I first came to in 1987 when, if my memory serves me right, the Merlion fountain sat in the grounds of the Raffles Hotel which sat in its own unique position on the Peninsula Marina.

Today, Raffles is surrounded by buildings, hotels and skyscrapers, and the Merlion statue has moved.

That’s progress, but then Singapore is a progressive place.

I won’t say too much about Singapore though as, if you’re interested, National Geographic had a superb supplement analysing all features of the country. I won’t say too much about the article, except that it’s opening gives away that it’s a great story:

“How did a sleepy little island transform into a high-tech powerhouse in one generation?” by Mark Jacobson

If you want to get a Singaporean to look up from a beloved dish of fish-head curry—or make a harried cabdriver slam on his brakes—say you are going to interview the country's "minister mentor," Lee Kuan Yew, and would like an opinion about what to ask him.

"The MM? Wah lau! You're going to see the MM? Real?"

You might as well have told a resident of the Emerald City that you're late for an appointment with the Wizard of Oz. After all, LKY, as he is known in acronym-mad Singapore, is more than the "father of the country." He is its inventor, as surely as if he had scientifically formulated the place with precise portions of Plato's Republic, Anglophile elitism, unwavering economic pragmatism, and old-fashioned strong-arm repression.

Unfortunately, it’s also a country I find difficult to enjoy straight away as I took the overnight flight from London which gave me about three hours sleep in 36 hours, so I spent yesterday fitfully sleeping on and off and watching crappy movies on HBO and Star ... but at least in Singapore you can watch crappy movies in the English language, unlike hotels in Europe where fitful night hours are dulled with non-stop CNN news.

Back to the conference though and Robert Prior-Wandesforde, Senior Asia Economist with HSBC, gave the opening speech: Asia - aren’t you glad to be here?

Here are my brief notes:

Asia - aren’t you glad to be here?

The economic recovery began around the second quarter of 2009 for most economies, and Asia’s industrial production index is now back on track, exceeding the peak pre-crisis levels of 2008. This unlike the Eurozone and USA, which took such a shock that their output is still at levels below 2000.

This means that Asia has reached a self-sustaining cycle, without dependency on USA and Europe, and the concerns over decoupling have not materialised because Asia is no longer coupled with the other geographies as they were a decade ago. In fact, Asia now has a virtuous circle of growth, based upon strong domestic demand, which boosts imports and exports, which helps lift personal income and profitability, which creates more domestic demand.

That is why HSBC forecasts year-on-year export growth of 20 %+ in the region, which is crucial to the level of sustainability of a recovery here in Asia.

But how can that level of export growth be the case when you have the mess that’s in the EU and America?

Answer: a lot of increase in demand has just been within Asia.

So we have this old world view of the American consumer being the consumer of last resort, but it has changed. For example, Korea’s electronic shipments to China and China’s shipments of electronics to the USA were closely coupled at the start of the 2000’s. Today, they are not.

Over the last 18 months, Korea’s exports to China have surged significantly but China’s exports to the USA have not. So it does suggest that the Korean products are going to China and staying in china. This is true not just for electronics, but for motor vehicles and more.

In other words, it’s the Chinese who are shopping!

Historically, China has been an export and investment led economy. That isn’t going to change necessarily, but the fact that private consumption as a share of GDP in China is about 36%, it singles the country out from others in the G20, such as the USA where private consumption is over 70% of GDP.

Equally, savings as a percentage of household disposable income has risen to almost 40% in China over the last decade, up from under 30% at the end of the 1990s. That compares to about 3% in the USA.

Why they are saving so much is, according to a survey of citizens by the Central Bank of China, for their child’s education and their own retirement. These are Chinese citizens’ major concerns and the Chinese government are therefore trying to change this mindset to encourage consumerism.

This does not mean a massive swing to USA-style consumerism, but does mean giving more assurance to citizens about education and pensions so that they save less and spend more.

If this does change the mindset of the people of China, then even a few percentage points swing to spending rather than saving will have a massive impact as it will change the habits of 1.4 billion consumers, not just a few million.

This does not mean that Asia does not need the USA and Europe though, and the risks of continued growth or not are related to America and Europe’s issues.

America has delivered better than expected results for the past few quarters, and so there is recovery there.

In Europe, there are different issues and the concerns about Greece are major. But Greece is a small country in Europe, and the contagion kicked off is not necessarily justified as Spain and Italy, which have been caught in this maelstrom, are different to Greece. Spain’s government debt to GDP ratio is half of that of Greece’s, whilst Italy does have a government debt issue but the budget deficit there is half of Greece’s.

The fundamentals are different but, overall, we do expect governments in Europe to increase taxes and reduce spending, with the UK being one of the critical countries to face that challenge.

In summary, Europe as a region may be in continued recession but you have to look to Germany, which stands out and is still motoring forward. Germany’s economy is about ten times the size of Greece’s and is stable. So there are positive indicators in the region along with those negative ones.

Other worries may be things like the end of policy support from governments, which is unlikely; the end of inventory-led growth, which is also unlikely; exchange rate appreciation, but that assumes demand disappears, and we cannot see that happening as Asia is now self-sustaining.,

There are also concerns about an asset-bubble boom and bust in China. For example, seventy Chinese cities saw property prices were up 12% year-on-year and, in Singapore, it is even more marked with private residential prices up 30% in just the last nine months.

In China, you then need to look at GDP growth, which was up 12% in the first quarter and nominal GDP growth for the last year was 15%, so a 12% rise in property prices makes sense.

What about inflation?

Inflationary pressures are showing some signs of issue, as it is growing rapidly with a bigger underlying inflation problem in the region anticipated for 2011. This means that asset price bubbles could develop in a more meaningful way going forward.

The issue here is that many of the Asian central banks are unwilling to tighten interest rate policies, but interest rates will need to be watched and managed carefully in Asia this year if we are to avoid an asset bubble next year.

Remnimbi is also a topical issue, with the Yuan:$ exchange rate pretty well fixed over past few years. The more pressure the USA puts on China to untie that fix, the more likely China will not do anything but we do think that China will appreciate the exchange rate later this year. It won’t be a massive revaluation of the remnimbi, however. It will just be tentative.

This is because China is worried about their exporters and want to avoid any double dip recession within China, so we expect it to be around a 5 percent appreciation of the Yuan against the US$ over the next nine months.

Longer term, our view is that we expect China to overtake the USA economy by 2035.

In other words, China will become the largest economy of the world in 2035, with the USA and Europe closely behind, and India nipping at their heels.

The only thing that can hold this back is that China’s government are showing too much concern right now about a double dip recession and asset price boom domestically, whilst India does have an asset price bubble and inflationary issues.

The Central Bank of China and Reserve Bank of India must get to grips with these issues to realise these dreams.

 

And the best bank brand in the world is ... Chinese

Fascinating report in the FT this week about Global Brands, with the financial sector bouncing back the strongest of all. MasterCard and Visa led the financial pack, although Goldman Sachs saw a 25% growth in brand value over the last year ... I wonder how much they lost this year?

Anyways, considering banks had the worst results ever last year and lost all brand momentum, it’s no surprise I guess to see they’ve bounced back this year, and even beat beer as a sector for brand improvements:

Year-on-year growth in 17 categories
Category                      Brand value growth (%)

Financial Institutions             12%
Beer                                     10%
Technology                            6%
Fast Food                              1%
Retail                                   -1%
Soft Drinks                           -1%
Mobile Networks                   -1%
Bottled Water                       -2%
Gaming Consoles                  -3%
Spirits                                 -3%
Luxury                                 -3%
Apparel                                -4%
Personal Care                       -4%
Coffee                                 -6%
Insurance                             -7%
Cars                                   -15%

Source: Millward Brown Optimor (including data from BrandZ, Datamonitor and Bloomberg)

Strange how and why insurance is languishing down the bottom though ... maybe it's their lack of ability to cover Toyota's these days, which is why the car sector sits at rock bottom.

All in all, a big contrast between this and the Harris Interactive Reputation Survey I blogged about earlier this month ... so brands and reputation have nothing to do with each other, do they?

What surprised me is the list of the top 10 brands in our sector (doubleclick picture to enlarge):

Wow! ICBC from China, the #1 bank brand in the world!

In fact, they’re the 11th best brand in the world, just behind Google and Apple:

A great report from the FT again, and well worth a read if you have the time ...

 

Bankers bonuses in graphics

Money.co.uk just sent me this lovely graphic that puts the banker bonuses in context quite well ...

 

First Direct's Twitter Sex Hack Attack

Everywhere I go these days, I see ads for following businesses on Facebook and Twitter.  The latest was down at the local winebar where they have this ad on the counter:

 

GET DISCOUNTS IF YOU FOLLOW US ON FACEBOOK!!!!

Works for me.

Apparently, some 27% of UK SMEs use social media to connect with customers according to a survey by Virgin Media and other studies show that the fastest growing companies are those using social media to communicate.

And yet, apart from First Direct, I still can't find a blog, facebook or twitter button on any mainstream bank website in the UK.

Mind you, it may be that banks are waiting until social media's issues are resolved before they dive in.  For example, here's a direct tweet I received from First Direct this morning:

Maybe that's the reason that most banks are onthe fence about social media, as they are waiting until the hackers and underware issues are resolved before they jump into the fray.

That also makes sense to me.

UPDATE
13:00 26th February

First Direct have clarified what happened and yes, they were hacked!

 

UPDATE 2

19:00 26th February 2010

First Direct posted an apology on their website:

If you're reading this you're probably aware that at 5 am this morning first direct's Twitter account was hijacked and used to spam our followers. We'd like to apologise for the message itself (no need to repeat it) and for the way we dealt with it in the first instance.

We would like to offer you some explanation for our actions...

How did it happen?

This morning (about 00.30 am) we received a rather salacious Tweet from one of our followers (their account had been hijacked too) and whilst checking it out proceeded to read the other direct messages we'd received.  One direct message was from a trusted source it read "ha ha is this you?" and included a link which we unthinkingly clicked on. 
 
We can confirm that our Twitter password is extremely secure (a long string of randomised characters, and regularly changed), and the only reason they were able to gain access to our account was through the mistake we made.  Obviously we changed our password as soon as we realised what had happened (and we have revoked the OAuth access of the spam generator), so our account is secure again.

Why did we respond the way we did?

We tweeted quickly out of a desire to re-assure people and perhaps should have gone straight to the third of our three tweets. We should have got an apology up sooner, and we probably shouldn't have used the word "hack". Twice.
We've now put steps in place to make sure it doesn't happen again.

Have any other first direct accounts been tampered with?

Absolutely not. This was an isolated incident affecting our Twitter account only.

Final word

This is new to us and to the financial services sector as a whole. We made a mistake, fixed it as soon as possible and we're taking steps to ensure it doesn't happen again. We're very sorry, but we are only human afterall.

The land of a thousand voices

It seems that I’m having a long whinge and rant all week, but I’m trying not to.

What I’m really trying to do is to get some answers to this crisis of confidence in the banks and, consequently, the banking system. This is nothing to do with the credit crisis, but the response of the banks to the credit crisis, which is to trash all trust and confidence in their ethics and approach.

This is why there is this non-stop bleating about bonuses and interest rates. The banks justify this behaviour on the basis of all the other kids on the block are doing it so, if we didn’t, we would just get beaten up in the banking playground by the bonus bullies. This is what Stephen Hester said today:

Mr Hester warned “that employees are leaving because it was offering lower bonuses than City rivals. He also said that profits at the bank, which is 84 per cent owned by the taxpayer, would have been about £1 billion higher if it had managed to stop staff leaving. The bank said it had ‘paid the minimum necessary to retain and motivate staff who are critical to the recovery of RBS’.”

Trouble is, this doesn’t cut the mustard.

MPs warned that the public would be astonished that the bank was paying £1.3 billion in bonuses given that it today reported a £3.6 billion loss for last year.

“Vince Cable, the Liberal Democrat Treasury spokesman, said: ‘Stephen Hester is trying to justify the unjustifiable. Most bankers owe their jobs to the taxpayer. His comments will just reinforce the view of bankers in many people's minds as greedy and selfish.’

“Shadow chancellor George Osborne echoed the views of Mervyn King, the Governor of the Bank of England, by telling BBC radio: ‘I do think the level of payment in the banking sector has got completely out of kilter with the rest of society. It is totally disproportionate to what doctors are paid, people working in industry are paid, teachers are paid and the like. We need to bring down pay across the sector — not just in one bank, across the sector — and things like a bank tax, internationally agreed, might help do that.’”

Oh yes, and I love the photograph the Evening Standard  chose to run with that report.

Hmmm ... Hester, the fox killing, horse and hound man.

Nice.

Meanwhile, in the same paper, Chris Blackhurst writes about how we've blown our chances to rein in the banks:

“We somehow think that the bankers will take it upon themselves to lie down on the steps of St Paul's and seek forgiveness — and reform their ways and slash their incomes. They won't. They're human. Yes, they're pariahs, but they will carry on taking the money until they're forced to stop, until the authorities say bank licences will be relinquished if bonuses are paid.”

But none of these arguments raging in the media address the real issue here.

The real issue is not bonuses, profits, lending or interest rates.

The real issue is a lack of internal market leadership within the banking industry.

Nothing to do with regulators, politicians or press. The most significant failure has been the inability for the industry to act as a cohesive hole (sic: whole) to respond to the issues arising under their watch.

Instead we act as a fragmented group of a thousand voices.

Individual voices stand up and are counted, and some count more than others such as the Jamie Dimon’s, John Varley’s and Stephen Green’s. But nothing is co-ordinated or arranged in a way that makes sense or alleviates the public anger and distrust in the system.

Take the example of the past week of banker’s bonuses.

Initially, one bank – Barclays – set an example of waiving bonuses payments, as their leaders chose to repeat the actions of a year earlier and declined the multimillion pound pot they were entitled to. Reluctantly the rest then followed with RBS, Lloyds and now HSBC one-by-one agreeing not to award their leader’s bonus.

The result is that they were accused of being lame sheep in doing so, just following the lead of one, and it just looked limp.

It also rang of insincerity anyway, in that several of these leaders are purely deferring bonuses and have taken large swags of cash via other means (e.g. Bob Diamond’s $46 million payout on the sale of Barclays Global Investors last year) or just don’t need it as most are on million-pound plus packages. In fact, one cynic said that there would just be a top-up of their pension pots to compensate, and so no-one sees these token gestures as being anything other than that- ‘token’.

Does this justify the payouts to their investment banking teams by making such sacrifices?

No.

Does it restore faith and trust and displace the anger and mistrust?

No.

So all it’s done is served as some form of internal justification for the continuance of mega-bonus payments to investment banking staff.

The issue still lies with the press, politicians and regulators however: in this land of 1,000 voices, where no-one coordinated single voice resonates, where is the leadership to change the system?

Take the example I’ve just given.

What bankers should have done is worked together to create a co-ordinated plan across the sector pre-emptively and early on.

For example, Stephen Hester (RBS), John Varley and Bob Diamond (Barclays), Eric Daniels (Lloyds) and Michael Geoghegan (HSBC) see each other often enough in front of Treasury Select Committees to be able to co-ordinate their responses.

So why didn’t they all agree upfront to defer leader’s bonus payments, and announce this as a co-ordinated approach pre-results season?

A joint announcement of rationale and reasoning would have been far more powerful than the sheep mentality manner of following the leader.

Equally, Jamie Demon Dimon (JPMC), Vikram Pandit (Citi), Lloyd Blankfein (Goldman Sachs), Brian Moynihan (Bank of America) and John Mack (Morgan Stanley) see each other all the time in front of Federal Committees. So why didn’t these leaders co-ordinate responses to bailouts and bonuses?

You may say they did, but not from an observer’s viewpoint externally.

It looks like maverick individual actions and approaches, with no single voice to rally the industry to a resolution.

Why these ‘leaders’ cannot organise themselves is beyond the ken.

After all, if these global CEO’s of banks had created a co-ordinated and rational campaign to cap bonuses, waive their own, provide charitable donations, show how bank lending and bailouts had been atoned, then the media, public and politicians would not be baying for their blood.

The fact that: (a) there is no single voice of leadership that is co-ordinated across these banks speaking on their behalf; and (b) these leaders have allowed banks to behave without change, as they were before and as if nothing had happened, is going to lead to a showdown.

That showdown is not far away and, according got all my sources, will be far more draconian and vicious than any action that would have been taken if the industry had spoken with one voice, rather than thousand.

But then, this industry’s ability to self-regulate with transparency and integrity historically has been pretty poor so this comes as little surprise.

Meanwhile, you only have to look at the fact that our poor old Queen has been forced onto the tube these days, to realise how hard times are in Britain ...

Numbers: First Direct UK versus eBank Japan

First Direct has:

• 3,200 staff
• 1.16 million customers
• 85%+ of customer contact is electronic
• 44% of sales are via e-channels
• 890,000 Internet Banking customers
• 370,000 SMS message banking customers
• 2.6 million text messages are sent to customers every month
• 157,760 telephone calls are handled each week

eBank Japan has:

• 2.8 million accounts
• 195 staff
• All customer contact is electronic

 

Malta, sponsored by HSBC

Just back from Malta for a brief trip, and was particularly taken with the fact that the country appears to be sponsored by HSBC.

Not just the airport, a hotel or a football stadium, but the whole country.

Where did this impression come from?

Well, from the moment of arrival when you are welcomed by a massive “HSBC welcomes you to Malta” sign and self-service lobby.

Upon arrival at the hotel, the HSBC sponsored guide to Malta’s Heritage is the first thing left out visibly on the desk of my room.

Opposite the hotel is an HSBC ATM and branch ...

 

... and every other ad in the newspapers is for HSBC and every time I use my Chip & PIN Card I get a thank you from ... HSBC.

Returning to the airport, I find yet more HSBC signage upon check-in as well as the usual gates, sponsored by ... HSBC.

So OK, Malta’s a small place – total population of only 400,000 – and so the bank’s beneficence in sponsoring the place is laudable ... it just worried me a little when the latest Malta headlines are about newborn babies sponsored by, yes, you guessed it, HSBC.

Note: in the interests of full disclosure, not all of the images and material used is from Malta

Update from First Direct's CEO on their social experiment

Matt Colebrook, First Direct's Chief Executive, has just written his initial observations about their social media experiment.  Interesting words:

“It’s now over four weeks since we launched our pioneering ‘live’ site and we’ve been overwhelmed with how it’s been received, over 2000 comments to date on a wide variety of topics.

“We’ve also seen a huge amount of positive comments about the site in the press, online and in social media. People have described it as brave. They might be right. What’s undeniable is that it's been the right thing to do if we’re to engage with our customers and understand how they feel towards us.

“We’re starting to analyse the thoughts, concerns and suggestions raised with a view to seeing where we might make improvements to the service and offerings we already provide. Clearly we can’t be all things to all people.

“Indeed we won’t be able to offer everything that has been suggested. But one thing we can and will do is at least capture and digest what our customers are saying. We are also introducing a way for us to join in the conversations on ‘live’ and I will soon start to feed back more detailed responses to some of the comments being left.

“The world of social media is one that is opening up a new voice for customers – we might not always get it right but you can be assured that happy customers are at the heart of our business. It’s what differentiates us from our competitors.”

Matt Colebrook
Chief Executive

Scotland the Brand

With the news this week of 3,700 job cuts in Royal Bank of Scotland's (RBS) branches, the government increasing its stake in RBS from 70% to 84% and Lloyds setting off on a £21 billion fundraising spree, it seemed like a good time to launch the Financial Services Club Scotland.

We had our first meeting on Monday at the prestigious Royal Society of Edinburgh ...

... with keynote speakers John Rendall, Chief Executive of HSBC Scotland and Professor Michael Mainelli of Gresham College and the London School of Economics.

The focus of the first meeting was to study what the financial crisis has meant to Scottish industry, society, the economy and its future?

Here's a quick overview of a few key facts and backgrounders.

Scotland's population is just over five million people, with 2.7 million workers and an unemployment rate of just over 7%.  GDP was £86.3 billion in 2006, but this is slowing with output in Scotland contracting 6.0% year-on-year since the second quarter of 2008, and Scottish GDP down 3.2%.

In particular, Scotland’s dominant service sector fell by 0.4% quarter-on-quarter during the three months to the end of June 2009, with banking showing contraction of 0.9%.

Banking in Scotland has a long history, beginning with the creation of the Bank of Scotland in Edinburgh in 1695.

Retail banking services to ordinary people followed in the 19th century based upon the trustee savings bank model and Scotland now has four large clearing banks: the Halifax Bank of Scotland (HBOS, now Lloyds Banking Group), the Royal Bank of Scotland (RBS), the Clydesdale Bank (part of National Australia Group) and Lloyds TSB Scotland.

RBS was, until 2008, the second largest bank in Europe and fourth largest in the world by market capitalisation and, in 2005, Scotland ranked second only to London in the European league of headquarters locations for European banks.  However, having expanded greatly with a growth rate of over 35% over the period 2000 to 2005, the sector is causing big challenges today as RBS and HBOS keep hitting the headlines and damaging the brand.

Even so, the financial services industry still employs 5% of the Scottish workforce or 113,160 people, and generates over £5 billion or 7% of Scotland's GDP. Edinburgh is still Europe's fifth largest financial centre and is the fifteenth largest asset managements centre of the world, and Glasgow has a thriving financial market in supporting operations and call centre management for many of the largest firms.

Equally, Scotland has one of the world's largest fund management centres, with over £300 billion worth of assets directly serviced or managed in the country.

All in all, the conclusion of the evening’s discussion is that you cannot linger over what is past.

RBS and HBOS happened: GET OVER IT!

Scotland now has to regroup, rebuild and refocus and probably get back to its fundamental roots of asset managmenet and prudence.,

Meanmwhile, one of Scotland’s biggest success stories is the Scotch Whisky industry.

The near totality of Scotch whisky production (90%) is exported, and exports rose 4% to a record $5 billion in 2006, when whisky sales accounted for 25% of Britain’s food and drink exports.

Wow!

So, if Scotland’s banks can mess up our money, at least we can console ourselves with a stiff shot of whisky.

And that's what we all did at the end of the meeting:

Actually, it was just wine and nibbles, no Whisky, but maybe next time.

Oh yes, our next meeting will take place in January 2010 and will focus upon “Scotland the Future”, with senior figures from new, Scottish based banks such as Virgin and Tesco.

And our third meeting in March will examine “Scotland the Recovery”, and will look at how the Scottish banks have turned around with a focus upon the state of play with HBOS and RBS.

So, if you're reading this and you're in Scotland or you're Scottish, then come along join in.

*

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First Direct leading the social finance mainstream

For over four years, since Facebook first appeared on my radar, I've been waiting for a UK bank to really get into social media.  There have been a few attempts but nothing really mainstream.  For example, the Co-operative launched a MySpace site for Good with Money and Barclaycard did some good things, but most was a gimmick or poorly delivered. 

Generally however, UK banks are reticent when it comes to blogs, podcasts, interaction and Web 2.0.

Finally, for the first time, one gets it.

First Direct.

First Direct launched their social media newsroom in June this year ...

 

and they've been on Twitter since April 27th ...

and have 464 followers and 168 tweets as of today.

So it's great to see them launch a truly open dialogue in their Live area, which was announced in the newsroom yesterday.

"We wanted to give our customers the opportunity to talk back and let us know how they really feel about us.  With this in mind we recently launched our new acquisition campaign - "Live".  It works by taking everything that's said about us online, from over 8 million forums, blogs and social media sites, and then feeding it, live, onto our website www.firstdirect.com/live for all to see.  At the same time we also launched Talking Point - a section where customers can leave a message for us."

Viewing the Live home page, you get some nice commentary to encourage you to dialogue:

 

and it clearly highlights some of the positive views:

as well as the negative:

 

In fact they clearly demonstrate how positive or negative customers are being overall:

with + signs for positive and - for negative floating up and down the home page, in real-time we assume ...

 

So hats off to First Direct for being at the forefront of UK financial social media.  In fact, a real hats off as you can find all of this easily from their home page:

 

as, being Mr. Cynical, some would think this would be hidden away in some microsite somewhere.

Only a bank voted consistently number one by independent surveys would have such confidence to do this of course.

And, just as a reality check, I thought I should see if any other UK bank had a blog, twitter link or anything on their home page to demonstrate social interactivity.

Lloyds TSB?

Nope.

No blog or anything.

NatWest?

Nope.

No podcasts or anything there on the home page.

Barclays Bank seemed to be better as, on their homepage they have a clear area prompting customers to ask a question:

 

so I thought I would search for where's their blog?

Can't find the answer?  Contact us. 

UK banks generally don't offer anything social on their internet prescence today: no Facebook, Twitter, Blog, Podcast or even interactive live chat.

It does confirm that banks don't want to interact with customers online ... only on the telephone or in branch.

At least First Direct is demonstrating some leadership here and it will be interesting to see how their service develops as the first UK bank to be in the forefront of this space ... a bit like they were the first UK bank to lead the telephone banking revolution.

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Why First Direct wins

Director magazine has a fantastic case study all about First Direct this month.  First Direct is regularly voted the UK's #1 bank and many people have no idea why.  Here's why:

“Consumers don't like call centres—it's an indisputable fact. The anecdotal evidence is everywhere, but more scientifically, an ICM poll found that four out of five UK consumers feel "stressed and frustrated" at having to deal with them.

“And almost two-thirds say they "loathe" the experience. Little wonder then that life on the other end of the line can be pretty miserable. The average call centre employee is more likely to phone in sick than any other worker. Company loyalty is rare: staff turnover runs at around 25 per cent each year across the industry, but it isn't unheard of to come across levels of 100 per cent ...

“In between all the fun, First Direct's call centre staff receive an average of 10 calls every hour—or around 28,000 conversations each weekday. Not many people's idea of a blast, but management must be doing something right. At 14 per cent, staff turnover is way below the industry norm. Happy employees are good to have around if you want satisfied customers. Last year, a GfK NOP survey recognised First Direct as the best call centre in the UK for customer service. This year, it won the Your Money award for best online bank.

“And while many customers seem satisfied, some look obsessed. Every year, the company receives calls wishing staff a happy Christmas. Some customers call daily, often with personal rather than banking matters ...
“According to research, 59 per cent of engaged employees say that work brings out their most creative ideas. Only three per cent of disengaged workers say the same.

“‘Getting innovation through organisations demands people to be completely committed’, says MacLeod. More pertinent to First Direct, which relies heavily on reputation, ‘67 per cent of engaged employees advocate their organisation’. Only a tiny fraction of disengaged staff make the same effort.

“Jayne Carrington is managing director of HR consultancy Right Management. Her company's research into employee engagement shows ‘44 per cent higher retention, 56 per cent customer loyalty, 50 per cent more productivity’—and all in a business likely to be ‘33 per cent more profitable’. It's a compelling set of figures.

“Carrington says reputation receives a boost from engaged employees because they radiate positivity for the brand. First Direct's efforts to place engaged employees at the heart of its business has ‘paid dividends in terms of reputation and shareholder value,’ she says. ‘Two colleagues said when talking about First Direct, 'they are brilliant, I love them'. That advocacy, that customer loyalty and the reputation First Direct has, comes through their staff.’

“To measure levels of engagement, First Direct employees are surveyed annually by HR group Kenexa. Senior consultant Christian Roome says that the bank's engagement scores ‘stomp all over’ the competition, making its staff among the most engaged in the financial sector.”

*

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Is there any innovation here? Nope

After the innotribe stuff, it was off to a panel debate about “payments innovation”.

This session was described as follows:

“The crisis has put the emphasis back on traditional banking and sources of revenue, with payments coming to the fore again. Yet payments are also seen as a commoditised, legacy business where scale is everything. Into this business come a series of new market demands which might change this such as same day retail payments, e-payments, mobile payments, contactless cards and real-time finality. How will these new opportunities develop and will they be profitable new forms of business? Can banks afford to develop new channels individually or will they need to co-operate further? Will non-bank players use technology to challenge banks for their new payments service business?”

Bearing in mind that innotribe was all about innovation, it is obvious why this session was of interest to me.

This session was chaired by Robert Heisterborg, Global Head of Payments and Cash Management at ING, with a panel comprising:

• Rajesh Mehta, Managing Director, Head of Treasury and Trade Solutions, EMEA Global Transaction Services, Citi ;
• David Sear, Divisional Managing Director, Travelex Global Business Payments ;
• Marcus Treacher, Head of electronic banking and e-Commerce, Global Transaction Banking, HSBC; and
• Russ Waterhouse, Executive Vice President of Products and Development, The Clearing House.

Here's a summary of how it went:

Robert Heisterborg:

Who’s driving innovation?

Rajesh Mehta:

The innovation drivers I can see include:

• the miniaturisation of payments - especially as there’s more P2P taking place;
• government’s needs, especially in current economic climate;
• banks seeing payments as a product rather than looking at payments as a business in its own right, which is what non-banks do;
• regulatory change; and
• risk management.

Citi in particular is focusing upon prepaid cards and mobile as key new innovation areas.

Marcus Treacher:

Often the idea of the innovator is not the way it works in reality. My favourite example is the ATM which was introduced as an automated teller in branches and it failed. In desperation, the developers decided to try the machine outside the branch and it took off. That was an accident, but one that created success.

Russ Waterhouse:

As a market infrastructure we’re the last place people would normally look for innovation, but we have to do this because it is required, expected and needed amongst our clients and community. The challenge to do this is that many of us benefit from the inconsistencies in the markets, and we have to rethink our business models if we are to take advantage of creating innovation through more consistency.

David Sear:

When we refer to payments innovation, the only example normally mentioned is PayPal and I’m a little tired of hearing about PayPal. They’ve been around over ten years now, so get over it. PayPal have a billion dollars of revenue in Europe alone so their innovation has happened, they have achieved change and they’re here to stay.

Now, as a consumer, I may not want PayPal because I find it difficult to use. It’s clunky and doesn’t provide me with the security I want. For example, a recent US survey by Nielsen found that 81% of consumers would prefer a P2P payment instrument provided by their bank. So we have to do a little better particularly as there is a trillion dollars of ecommerce out there each year, and 20% of that is cross-border.

Prepaid cards are becoming a mainstream in the payments landscape, and that’s another key innovation we are tracking.

Equally, I’ve heard lots of people talking about convergence this week and I’d like to see that. In particular, I would like to see the end of the back street money transfer agent. Bank2Bank and Card2Card services, such as Visa money transfer cards, should mean that AML will go away into a different place.

Robert Heisterborg then asked the audience: “We have been here for a week, is there enough innovation at SIBOS?” and over 80% of the audience said ‘No’. Where were all of you when the innotribe sessions were running all week????

We then started looking forwards to the future of payments.

Rajesh Mehta:

The future landscape for payments will fall into three camps:

• Large global players with the advantage of scale;
• Niche specialist players with a vertical focused advantage, e.g. payment practitioners for the health industry or the pensions industry; and
• Hybrids who are capable of innovating themselves but acquire capability, distribution and technologies from partners who do this better than we do

Robert Heisterborg then referenced an ING trial in m-payments in Romania that found the average transaction value of a mobile payment to be €2.44. Therefore, is mobile the cash killer?

David Sear:

A decade ago we talked about micropayments killing cash on the internet and it hasn’t happened. For example, Google has announced a micropayment service for content recently but these sorts of developments are all about ‘if we build it, they will come’. It’s not what consumers want though. Consumers don’t want to pay for content and Google’s announcement of micropayments for content will therefore not necessarily work.

Rajesh Mehta:

How can you say that David when, in Africa you have four times the number of mobile telephones than bank accounts? How come you don’t think m-pay will happen?

David Sear:

Because consumers are asking for other forms of payment that are more traditional, such as prepaid cards in Africa rather than mobile.

Rajesh Mehta:

What will drive the mobile is banking the unbanked rather than the payment itself. However, once banked, then mobile payments will come.

The audience were then invited to ask questions and the first was about the fact that Nokia have 1.3 billion telephones out there and relations with all the carriers. The fact that they’ve partnered with Obopay should be seen as a threat should it not?

Rajesh Mehta:

No, as they are working with the banks on this. We’ve created a financial cloud at Citi for example, as a super settlement mechanism for the kind of needs of Nokia. It’s a settlement and clearing role and there’s always going to be collaboration with a bank on these things, so the question is really about the last mile. The last mile is all about who wants the connection for something as ubiquitous as a toothbrush, which is what the mobile is these days. For this, do I need to own the last mile? Do I need to compete with others there? Or do I enable that capability and collaborate? There’s always room for collaboration.

All in all, it was an interesting discussion but the fact that the panel talked mainly about prepaid and mobile, but no real discussion of SEPA innovations around einvoicing or contactless payments was an oversight, so I asked about contactless.

Of course, the panel said that it was not purposefully missed off the list, and that this is going to be embraced.

My take on this: for ING, Citi and HSBC, contactless technology is still off the radar or it would have been referred to more strongly. Would have been interesting to see Octopus or Barclaycard or Visa PayWave or others, as thee form factor of contactless mobile or contactless watches (forget cards) is far more innovative as a consumer payment service than a mobile payment using SMS or something (which is where most banks focus first).

Net:net, and being honest, there was no real discussion of innovations here but the panel talked more about stuff that has been bubbling away for years in the form of prepaid cards and mobile payments. Even if they had talked about SEPA einvoicing and contactless, it’s not really innovatory.

What would be truly innovatory would have been to discuss the next generation of payments using wireless technologies to pay without any physical devices involved.

Now, that is revolutionary and I’ve got a whole nine yards on that innovation.

Anyone wanna hear it?

Regulate for what's needed, not politics

Just went to another great plenary session discussing whether transaction banking will be the engine for the next phase of sustainable growth and moderated by Karen Cone of TowerGroup. The panel consisted of the heads of global transaction banking from some of the largest banks:

• Werner Steinmuller of Deutsche Bank
• Andrew Long from HSBC
• Catherine Bessant with Bank of America
• Francesco Vanni d’Archirafi at Citi

Here’s my loose highlights of what was said and please note that these are not directly quotes but an interpretation which began with each panellist providing a view on the current regulatory environment ...

Andrew Long:

I went to the European Union to find a continent covered by regulations and thought that was bad. The recently retired chairman of our bank, Sir John Bond, said on his retirement that he joined an industry with zero regulators and there are now over 300 when he retired, and that was bad. The result is that the costs and confusion created by regulations outweigh the aims and the benefits.

Werner Steinmuller:

Regulators are always following what is happening and should be more forward looking, instead of always trying to mop up after an accident. I want to see the regulator, at least on the EU side, more coordinated. For example, we have European initiatives but no European regulator, and this would help if we had more harmonisation rather than country-to-country approaches. For example the PSD has country to country views and the cover payments initiative has no global coordination. The result is a lot of money involved in implementation.

Francesco Vanni d’Archirafi:

Just to switch the lights on we have to constantly upgrade our platform to serve our clients. Therefore business as usual, particularly with earnings pressure, will push the industry to continue to collaborate. I use scale providers when we don’t have the scale in our business and that is what others will need to do.

Andrew Long:

Regulators tend to introduce these rules and think we make so much money that it doesn’t matter, but they forget there are a lot of smaller banks that also have to comply. The costs for them are too great. This means there should be industry created platforms to support compliance with shared costs for all, rather than all the costs being applied to each institution.

Catherine Bessant:

When I think about the risks that are in the system, it is not that they are unknown to us but that they are different to those of the past: the average size of risk, the speed at which things move and how decisions are made, the costs and volumes involved. There are a lot of challenges there. The nature of counterparty identification and counterparty risk is a critical factor. Also, the places we take risk are not necessarily the places where we get paid. Daylight overdrafts for example, and the exponential risks involved there. We are not necessarily adept at educating our clients on the risks that we are taking and sometimes we are not adept at doing that internally. We have to work different ways as a result, in order to get value out of the system. This is why the notion around cooperation and leveraging scale and partnership within the industry makes sense.

Andrew Long:

We are all paid to take risks and if we didn’t, we wouldn’t be in business. In the securities space are massive risks hidden away. We are now talking about how we manage risk on an individual and systemic basis. There are significant intraday risks in there and we need consider these and price them accordingly.

Francesco Vanni d’Archirafi:

Everything we do is focused upon releasing working capital for our clients. The more you can squeeze cash from working capital, the more efficient our clients can be. This means we need to give visibility and transparency for our clients and allow them to manage risk on their balance sheet and transaction flows based upon that visibility and transparency to give them more control.

Catherine Bessant:

We, as bankers, have a duty to our clients to provide a window into the marketplace because we understand the functioning of the marketplace. We have a track on global trade flows and trade movements and, as capable as we are, we must step up our accountability to this so that our clients know as much as we do about those flows.

Andrew Long:

We will have to do more in responding to regulators and making sure our internal controls are in place. That means more costs as this is not just the risks we are aware of historically, but now legal risks and fiduciary risks and more. We’ll need to spend a lot of time on the legal documentation in the securities business for example.

Werner Steinmuller:

Compared to other areas in banking, we work much more together in transaction services, where our biggest competitors may also be our biggest clients. Without working together, payments would not work. For example, without SWIFT, we couldn’t do what we do. This is why, during the crisis, you didn’t hear about issues in the infrastructure and how the systems work or any failure in payments or settlement. BAFT is also following our interests and we are talking about how we can standardise the processes more and work together more. Sharing information on fraud protection for example, and also in the area of having a common voice to the regulator.

Francesco Vanni d’Archirafi:

We work together more because forcing people to stay with you because it’s difficult to unplug is the model of the past. This is why most banks will consider using shared services outsourcing from a competitor’s transaction services structure in the future for this reason.

Catherine Bessant

We’ve spent a lot of time working out where is the moment of separation where we need to compete and where is the moment to leverage where the scale and operation of working together can achieve more than competing. We have a joint venture with Wells Fargo in this space called Pariter** for example. The reaction to this announcement has been evidence of what an unnatural act this collaborative competition is. There were very negative reactions from some, including the Federal Reserve, about how that impacts the traditional ways we have done business. We have a lot of structures trying to craft cooperation now though, and the crisis has brought us to a moment where we have realised how we can work better together.

Francesco Vanni d’Archirafi:

The market forces us to do this, not just the regulators.

Andrew Long:

We are also seeing global changes in trade trends – the north-south trade flow is declining but the south-south emerging markets dealings are growing. There are huge opportunities here in Asia and once we work out how to leverage those opportunities through the right products in the right systems, we will be far more competitive as I’m sure my competitors are thinking today. If you introduce new products priced appropriately and have a good balance sheet, then you can grow your business by leveraging your strengths ... but you must know what those strengths are.

Catherine Bessant:

The value we get paid for the business that we do has not just reduced in the last two years, but in the last ten. There’s a painful truth about the economics of our business.

Andrew Long:

The regulators now recognise how systemically important our service is in trade flow and commerce globally, and are now asking: if we are so systemically important are we too big to fail? The answer to that is to ensure capital is covered and therefore this is why capital flow and analysis has been a key.

Werner Steinmuller:

Also, if a provider should fail, there should be no issue in moving their service to another. That’s the basis of open connectivity today. On another note thought, in Europe, I have two messages for the regulator on SEPA.

First, come up with an end-date

Second, harmonisation. If you have one SEPA Direct Debit, but each country with a different implementation then you don’t have a single direct debit for Europe, and this is crucial for SEPA. If we are not strict on harmonisation then the total SEPA introduction is at risk.

Note: this is what Weiner said in the research note on PSD and SEPA we released last week

Francesco Vanni d’Archirafi:

I agree and we also need to ensure the end-date is not too far out. A date please and the sooner the better in our view.

Werner Steinmuller:

2012 would be ideal, but 2013 is realistic.

Andrew Long:

I disagree. We don’t have an end-date it’s because there’s no client demand. So my message would be make SEPA and the PSD more relevant and get the markets – corporates and citizens and countries – to see it as necessary. They see it as driven by politicians however, and not as relevant.

Francesco Vanni d’Archirafi:

If we look at the European securities space, MiFID and T2S are creating major headaches for many of us around the table, and these programs have irrevocably squeezed profit pools from the trading environment. I think that’s good for Europe though as we have new business models and efficiencies delivered as a result. This is what SEPA should achieve in the future – more efficiencies through new business models.

Andrew Long:

I don’t disagree that we need efficient infrastructure but I take the view that rather than making the rules and then forcing the market to follow we should understand what the market needs and then make the rules.

** Wells Fargo and Bank of America have announced the formation of a joint venture to operate a single, combined automated clearinghouse (ACH) platform for both companies and their clients. The new entity, called Pariter Solutions LLC, will be the country's largest processor of ACH payments.

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Sir Howard Davies on leverage, the crisis and the FSA

Just found a great YouTube channel called the Banking Conversation and run by my mate Emmanuel Daniel, editor-in-chief of the Asian Banker.

Interviews include Stephen Green (Chairman of HSBC), Craig Donahue (CEO of CME Group), Dick Kovacevich (Chairman of Wells Fargo),  Chuck Prince (former CEO of Citigroup), Fan Gang (Director of the Institute of Economic Research of China), and more.

One that caught my eye is a half-hour interview with Sir Howard Davies, former Chairman of the UK's financial authority and now a Director of the London School of Economics.

The interview is in three parts.

Part One

Part Two

Part Three

He also wrote an opinion piece for the Japan Times that supports the views expressed in the interview and refers to analysis that shows that if "you had placed a long-term bet on financial equities in 1900, along with a short bet on general equities — in effect a gamble on whether the U.K. financial sector would outperform the market. For the first 85 years, this would have been a very uninteresting gamble, generating an average return of only around 2 percent a year.  But the period from 1986 to 2006 was radically different. During those two decades, your annual average return would have been more than 16 percent."

Fascinating stuff ...

First Direct, Cahoot and Smile win again

Two years ago, the BBC ran a survey of 13,000 viewers about their satisfaction with banks and found that the leading financial providers were Cahoot!, Smile and First Direct, whilst Abbey came last. 

Unfortunately, the Beeb has removed the survey from their website but the chasm between leader (90% customer satisfaction) and loser (45%) was dramatic.

The other thing I noted back then is that the winners were all banks without branches and that the respondents had no link between the bank and their parent.  For example, First Direct's ATM network was voted the best in Britain whilst HSBC's was one of the worst - it's the same darned bank and ATM network! 

Now Which?  - the UK's leading consumer rights organisation - has surveyed 14,000 people during the first half of 2009 to find out who is Britain’s best bank. Here are the summary results:

Best current account

91% Smile (206)
90% First Direct (423)
84% Co-operative Bank (151)
84% Cahoot (68)
79% Nationwide (676)
74% Intelligent Finance (60)

Worst current account

50% Northern Bank (33)
51% Abbey (200)
53% Bank of Scotland (264)

* figure in brackets is number of people who voted with an account at that bank

The big four UK banks – NatWest, Lloyds TSB, HSBC and Barclays – are used by 47% of those surveyed and all scored between 55% and 60%, or low in other words.

Again, banks without branches represent four out of the top six.

Equally, the reappearance of Abbey in the bottom three is surprising as, two years ago, their issues were all about a systems upgrade.  Maybe customers haven't forgotten how bad that experience was.

Anyway, it makes no difference to customer loyalty with 61% of respondents saying that they have had the same current account for over twenty years.  Of those who switched (23%) only 7% did so in the last year, even though half of them say it's easy and hassle free.

Combine this with another survey which found that most people wouldn’t bother switching their bank account, particularly to a new entrant, and you realise that once you've got the sucker's account opened, you've got them for life.

Whatever.

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Tesco, Virgin, O2 and all ... we don't want your banks

Marketing week ran a fascinating survey of British citizens last month and their views about banking.

The results find that most people don’t trust trusted brands with their money, and would rather stick with the banks.

The survey sampled 1,716 UK adults and asked a series of questions, including...

Which, if any, of the following brands would you consider taking out a financial product with (e.g. credit card, savings account, current account)?

None of these               65%
Tesco Finance              20%
M&S Money                  18%
Sainsbury’s Bank          15%
A charity you support     6%
ICICI                             4%
O2                                3%
B&Q                              1%
Pizza Express                1%

These results surprised me with 65% of consumers saying they would not take out a financial product with any of their favourite brands. I was also shocked as Tesco, M&S and Sainsbury have been in banking and financial services for over a decade. After ten years, can it be true that people really don’t trust these trusted brands? What would the score be for Virgin, another major brand that has been digging into this space for a decade?

This was no more surprising than the shock result of the next question ...

What are the most important features that you look for in your main financial provider?

Easy/convenient banking online                       41%
Competitive interest rates                              39%
Security                                                         37%
Overall stability of the financial institution       34%
Reasonable and non–punitive fees                    24%
Error–free management of accounts                 22%
Convenient branch network                             17%
Well established financial services brand          16%
Treating me like an individual                         15%
Friendly and easily accessible staff                  15%
Don’t know                                                      5%

The number one answer is easy and convenient online banking? Wow! Only a few years ago, most people would have said that they weren’t interested in banking online due to issues over reason number three – security. Amazing what broadband access can do isn’t it?

Mind you, with online banking used by four out of five households these days, maybe it’s not so surprising.

Then they asked which statements folks agree with, and these were quite surprising (or not) too ....

• Both individuals and companies have taken on too much risk for short–term gain (62%)
• It’s easy to feel you’re no longer in financial control (59%)
• It’s hard to know who to trust in the world of financial uncertainty (53%)
• Banks don’t care about the person behind the money (52%)
• Too interested in new customers, banks have forgotten the basics (50%)
• Banks are too focused upon profits and shareholders to have customers’ interests at heart (49%)
• Too complicated and confusing means I switch off (20%)
• I get more out of spending money than saving it (17%)

I can understand the first three statements, but these results mean that every other customer of a bank thinks that their bank is not interested in them as a person or as a customer. Wow! So why do they stay? Why don’t they switch?  Maybe it's because 1 in 20 have no idea why they chose their bank ...

... or maybe it’s because, as the editor of Marketing Week writes, “a month ago I changed my bank. I’m already fighting with the new people in charge of my money over £70 worth of what I consider to be unwarranted charges.”

There’s quite a few other worthwhile things to quote from the article too, such as Philip Mehl, Head of Marketing for HSBC UK, who says: “We have avoided jumping on to the bandwagon of telling customers how to run their lives better in a recession, as we have learned that customers want banks to run their own businesses better before we start throwing out unsolicited advice.”

Jeez ... a banker talking sense. Stick that in your diary.

The article about the survey has a number of classic lines too.

“It seems that while marketers are always told that trust in brands equates to commercial success, the financial sector does not appear to follow this rule. In a Morgan Stanley survey published last week, consumers claim they trust Tesco more than the banks and believe it offers better value. But a third stated they ‘definitely wouldn’t’ or were ‘very unlikely’ to open a Tesco current account and this figure rose to half when it came to taking out a Tesco mortgage.”

Mmmm ... that’s good news for the launch of Tesco Bank isn’t it?

“When looking at which words consumers associate with their main bank, ‘loyalty’ and ‘acceptance’ rate highly while words like ‘anger’ and ‘contempt’ receive just a fraction of responses in comparison.”

So, the media are wrong about the general populous hating their banks then?

The article then gets into some case studies with banks and non–banks, with some fascinating conversation with Alistair Johnston, O2’s marketing director:

“We’re acutely aware the communications sector around voice and text has reached its [full] size and, if we’re going to grow the business, then we have to find new areas ... we think we can offer new ways to manage money. In the future, people will be walking around with their phones, they won’t have cards or wallets”, he says.

That’s why O2 have launched a couple of payments cards, as have Phones4U, to test the waters of banking.

Even so, this is not necessarily the biggest concern for big banks. Their concern should be customers switching to small banks.

“Co–operative Financial Services claims it has seen a ‘massive increase’ in customers switching from the big names to smaller ones. Specifically, in comparison to last year, there has been a 636% increase in RBS customers switching, 236% in HBOS and 165% in Lloyds TSB.”

Yowzer! What does this mean for the big banks?

Maybe take a tip out of HSBC’s flagship customer brand, First Direct?

“First Direct head of digital marketing Joan Sutherland explains: ‘86% of all our transactions are now online, so our biggest challenge is how to replicate the fantastic rapport our reps developed with customers on the phone and inject the brand personality into the online space.’”

What did they do?

Lots of personalisation including the social media newsroom and Virtual Forest, a place where customers get to plant a tree for every time 20 accounts switch to paperless banking.

They also focused heavily on the mobile space, with 500,000 hits on the website from iPhones so far this year to July.

All in all, it’s about innovation, which brings me back to Philip Mehl of HSBC.

“The tendency in any recession is to go into lockdown mode and this is precisely not what we have done. First, if you don’t invest for growth, when it does arrive you’ll be slow to take advantage of it and second, innovation can take time to come on-stream so it needs to be planned well ahead.”

I told you he talked sense, didn’t I?

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UK banks give thanks for fair value accounting

The UK banks announce their half year results this week (results are provided at the end of this entry, as they are released).  And the results look good. Not great, but good.

This follows on the US banks second quarter results, with Goldman Sachs reporting record profits that were twice as good as expected, and even Citi and BoA reporting profitability, albeit thanks to sales of key assets. The rest has been down to a good investment banking run, with a strong stock market rally and benign yields on fixed–income products.

The UK banks don’t have quite the same conditions, although Barclays should see a strong surge thanks to Barclays Capital. Like the US investment banks, Barclays has the strongest trading desk of the big UK banks. They’re also benefiting from picking up the best and most profitable parts of Lehman Brothers American operations last year and, all in all, this strength will be demonstrated in very strong results.

Barclays were also the bank that had a share price that sank to just under 48p at one point which also reflected the issues of taking over Lehmans and the volatility of Q4 2008. But now, the share price is up over £3:00 in latest trading, a six–times multiplier on a January investment, and all is good.

This is well demonstrated by by the Abu Dhabi investment fund. The fund has made a 73 percent profit so far on their investment after only eight months. Not bad for a loan that allowed Barclays to escape the UK governments clutches.

Result? Abu Dhabi decides to invest in Richard Branson’s space project, Virgin Galactic. Mind you, if you’re making that sort of profit, you would have money to burn wouldn’t you?

Barclays has had a few ups and downs this half–year though, as their dealmaker of the Middle Eastern bailout was Roger Jenkins. Roger Jenkins is one of the most critical players in Barclays’ investment banking operations, and he recently announced he was leaving.

But things overall are good in the Barclays camp which is why they filched the trading desk of Royal Bank of Scotland recently, which bring us on to RBS.

RBS will still have issues and are expected to report a loss. In fact, they’re expected to report a big loss as Stephen Hester, their CEO, is rumoured to be throwing in as much bad news now as he can. Nevertheless, he could be right to do so as, after Q1 reporting, there was a fascinating analysis in the FT about RBS and their asset backed securities.

In the Alphaville blog, the FT had an April article called: “Black swans, black sheep in the world’s biggest balance sheet”.

The FT had spotted in RBS reports that “impairment losses and credit market write–downs totalling £4,927 million ... were partly offset by gains on the fair value of own debt of £647 million.”

What this gets at is fair value accounting and who some screwy book–keeping can make paper profits and losses.

For example, RBS held £92 billion worth of asset–backed securities (ABS) in 2008, shrinking to £86 billion at the end of Q1 2009.

The article then goes on about complex investment banking stuff about hedgies and monoclines, but the reason I pickup on this is that discussion about ‘fair value’. Last year, RBS and the other UK banks were forced to write–down paper losses on assets that were far bleaker than the reality.

This is the nature of IFRS accounting and mark–to–market rules. The result is that the banks appeared to be haemorrhaging losses. What it forgets is that the assets that back those paper–based securities are still assets and, under fair value accounting rules, the write–downs made in 2007–2008 are now being written back in 2009.

This is why RBS should deliver a profit, although it’s a smaller one than expected thanks to Mr. Hester’s conservative approach.

Unlike Lloyds.

Lloyds Banking Group are also writing off major losses on their debt book. These losses will be the largest of all the banks, about £11 billion worth of the £32 billion expected across all UK banks, and relate to mortgage, credit card and other credit related losses. These are the losses that are the reason for banks to still be cautious about lending generally.

However, even with this big loss, I’m still thinking Lloyds will turn a small profit thanks to the accounting technicalities of fair–value accounting along with phenomenal operating profits. According to what I’m hearing, Lloyds delivered a £7 billion operating profit in the first half of this year thanks to low costs of borrowing due to low interest rates, whilst maintaining high costs of borrowing to customers, in line with the general markets. Add to this gains on write–offs last year, under fair value rules, and Lloyds like RBS will turn a profit.

Unlike the shock of HSBC.

HSBC should be delivering solid results, and usually do, thanks to their globally diversified portfolio. Trouble is, they took over household in the USA just before the subprime disaster hit and, as a result, have written off more losses than any other bank. Over $50 billion worth. No wonder they have activist shareholders baying for blood.

But read a little further between the lines of HSBC’s balance sheet, and you will see that it’s not as bad as it looks. Why? Because the same accounting rules that will gift RBS and Lloyds some profitability will take away the solid performance of HSBC’s operations due to their £12.5 billion rights issue in March.

All in all, it’s going to be a pretty topsy–turvy week ... except that John Varley and his merry crew will be enjoying the surge of being the only UK bank that can claim to be making a profit without using creating accounting ... this time.

[If you want an alternative analysis for this week's banking results, the BBC has a good summation]

UPDATE #1 8:45, 3rd August

Barclays make £2.98 billion profit

Profits at Barclays Capital, the bank's investment arm doubled to £1.05bn from £524m, boosted by its acquisition of Lehman Brothers in the US and strong debt, currency and commodities revenues. But a rise in impairments to £4.56bn, up 86pc from £2.45bn a year ago, dragged profit in UK retail banking down 61pc to £268m and knocked its commercial bank profits 42pc lower to £404m. Barclays Capital reported a £4.68bn writedown on credit market exposures, including impairment on loans of £1.17bn. There was another £3.39bn in other group impairments and credit provisions.

UPDATE #2 9:30, 3rd August

HSBC global profits slip to $5bn

Banking group HSBC has reported pre-tax profits of $5bn (£2.98bn) for the first six months of 2009. The figure is about half what it made in the same period a year ago.

Bad debts halve HSBC's profits

UPDATE #3 17:00, 4th August

Good analysis of UK bank capital ratio's:

BARCLAYS (BARC.L) (Pro forma June 30, 2009**):
Tier 1 capital 47 billion pounds
Core Tier 1 capital ratio 8.8 percent
Tier 1 capital ratio 11.7 percent
Presents the impact of the sale of the Barclays Global Investors business to BlackRock Inc.

HSBC (HSBA.L) (June 30, 2009):
Tier 1 capital $117.35 billion
Core Tier 1 capital ratio 8.8 percent
Tier 1 capital ratio 10.1 percent (June 30, 2009)

LLOYDS BANKING GROUP (LLOY.L):
Tier 1 capital 13.7 billion pounds (2008)
Core Tier 1 capital ratio 6.4 percent (January 2009)
Tier 1 capital ratio 9.8 percent (January 2009)

RBS (RBS.L):
Tier 1 capital 69.84 billion pounds (2008)
Core Tier 1 capital ratio 6.7 percent (March 31, 2009)
Tier 1 capital ratio 9.9 percent (March 31, 2009)

STANDARD CHARTERED (STAN.L) (2888.HK):
Tier 1 capital $21.51 billion (June 30, 2009)
Core Tier 1 capital ratio 8.4 percent
Tier 1 capital ratio 11.5 percent
Pro forma August 4, 2009, reflecting 1 billion pound ($1.7 billion) fundraising

NORTHERN ROCK (NRKx.L)
Tier 1 capital after deductions 0.5 million pounds

(June 30, 2009)

Sources: Reuters; Company reports

UPDATE #4 22:30, 5th August

Lloyds rallies despite £4bn loss (BBC)

Shares in Lloyds Banking Group surged by 11% despite its announcement of a £4bn loss in the first half of 2009, due to mounting bad debts at HBOS. Comments that most bad news was now out and that future results would improve had heartened investors, said analysts. The group, which is 43% owned by UK taxpayers, said £13bn of loans and investments had turned bad, most of them from Halifax Bank of Scotland. It predicted future such charges for bad loans would be smaller.

 

Source: BBC

UPDATE #6, 14:00 7th August

RBS cautious after reporting £1bn losst (Financial Times)

Royal Bank of Scotland on Friday said its results were likely to be poor for the next two years as it reported a net loss of £1bn for the first half of 2009 following a quintupling of impairment charges to £7.5bn. RBS, which is 70 per cent owned by the UK government, said the buoyant performance of its investment banking arm, whose £4.9bn operating profit saved it from posting a worse interim loss, was “likely to weaken substantially in the second half”.

RBS Presentation of Results (100 page pdf)

UP*

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