Walking around Davos, we stumble across a small enclave of bank chiefs sharing breakfast. In this case, Demon, Blankfine, Jinkens and Gilliver, the CEOs of JPM, GSachs, Barcs and HBSC respectively.
Walking around Davos, we stumble across a small enclave of bank chiefs sharing breakfast. In this case, Demon, Blankfine, Jinkens and Gilliver, the CEOs of JPM, GSachs, Barcs and HBSC respectively.
In 2008, we all thought banks were bye, bye, bye. Five years later, everyone is saying buy, buy, buy. Or Warren Buffet is anyway. In an interview with Bloomberg last week, Buffett said:
“The banks will not get this country in trouble, I guarantee it. Our banking system is in the best shape in recent memory. The capital ratios are huge, the excesses on the asset side have been largely cleared out. We do not have an unusually concentrated banking system compared to the rest of the world, and there are certain advantages in the largest capital market in the world to having banks that are somewhat consistent with the size of those markets.”
After discussing the economic backdrop, with a hot South America countering a consumerising Asia, it’s time to move on to looking specifically at the banking outlook, which is grim.
Or is it?
Two journalistic heavyweights - Patrick Hosking in the Times and Financial Services Club friend Ian Fraser - have highlighted a number of questions that the Treasury Select Committee should ask Sir James Crosby, former Chief Executive of HBOS (now Lloyds), today.
Sir James will be appearing in front of the Treasury Select Commitee at 3:30 GMT and the questions are pretty meaty. Purely because of the evidence against Sir James, it will be interesting to see his response, if these questions are asked.
Here's my summary of the most crucial pieces:
It’s Friday, it’s summertime and it’s the day the London 2012 Olympics begin.
Tonight’s opening ceremony should be amazing and so, rather than talking about banking today, I thought I would talk about banking Olympians.
Lloyds Bank were one of the first to sponsor the London Olympics.
They have an official bank sponsor website ...
... and spent £80 million to secure their Olympian status.
This was back in 2007 of course, before the financial crisis.
Since then, there’s been a long and winding road to get from a secure, boring old retail bank to being one of the UK’s leading fruitcake banks.
This was of course prompted or caused by Gordon Brown and Alastair Darling forcing the hand of Eric Daniels and Viktor Blank, the then CEO and Chairman of Lloyds TSB, to takeover HBOS.
Since then, the bank has tumbled into an abyss of issues which led to the government taking an initial 43% stake in the bank, lowered to 39% today.
The bank found itself in a quagmire of a mess, particularly with the commercial lending portfolio of HBOS, leading to consistent losses for the past few years.
The worst of these was in 2008-2009, when the bank wrote off £24 billion in debt, although the year-on-year results are not particularly impressive.
The bank posted an operating loss of:
The 2008 – 2009 losses are attributable to the mistake of taking over HBOS, which cost the bank around £42 billion in costs, compared to the mere £8 billion acquisition price.
But more worryingly they have other challenges today as the leading UK bank embroiled in the PPI scandal.
This is the insurance that was sold without customers being aware they were buying it, and Lloyds originally estimated the cost would be about £3.2 billion in claims.
They’ve now upped that to £4.3 billion so far, with £1 billion of this just the cost of processing the claims, half of which are fictional.
Then they’ve got burnt by the European Competition Commission forcing the sale of 632 branches in Project Verde.
This decision was forced upon the bank as they gained over thirty percent market share of UK current accounts when they acquired HBOS.
Trouble is that selling branches today is not easy, as there aren’t many buyers.
In the end, they sold the package to the Co-operative Bank in a deal that was daylight robbery.
Just look at the numbers:
Lloyds deal with the Co-operative
Price paid: £350 million + £400 million promised
Number of branches: 632
Virgin deal with Northern Rock
Price paid: £747 million + £538 million
Number of branches: 75
And some people thought the Northern Rock sale was a bad deal.
Lloyds was a real humdinger.
For example, they got way less than their original £2 billion estimate for the branch deal value and it cost them £1.8 billion to get rid of the branches. This was admitted yesterday when the bank stated that it had cost them around £1 billion to organise the branch sale and they had lost £800 million on the deal value.
Hmmm … doesn’t sound like good business logic to me.
Finally, there’s another small matter of LIBOR.
The bank also stated yesterday that they were involved in the scandal as defendants in several law suits that analysts estimate will cost them at least £1.5 billion or more.
All in all, between Verde, LIBOR and PPI, the bank still has a long road to run before they get out of the woods.
An Olympic marathon, you might say.
For those interested, here’s a summary of yesterday’s news stories about Lloyds:
Lloyds Banking Group has posted a half-year loss and has increased provision for payment protection insurance (PPI) claims by £700m.
It is the second time this year Lloyds, which is 39% taxpayer-owned, increased the provision for PPI claims taking the total cost to £4.3bn in 18 months from an original £3.2bn. The new provision drove the bank to a half-year loss of £439m, down from a loss of £3.3bn in the first half of last year when PPI also drove the bank into the red.
A regular critic of the claims management companies that put in claims for PPI mis-selling on behalf of customers the bank’s CEO, Antonio Horta-Osório, revealed that the bank had deployed 1,000 staff to tackle erroneous claims. He said 50% of claims put in by these firms are false, double the level three months ago. Redress payments made and expenses incurred for PPI by the end of June 2012 had reached £3bn.
Lloyds is shrinking.
Non-core assets declined from £140.7 billion at year-end to £117.5 billion and it expects to reduce non-core assets to £90bn by the end of next year, a year ahead of its target, and a negligible £70 billion by the end of 2014.
Lloyds is a defendant in several Libor-related lawsuits. Research from Liberum Capital has suggested it could have to pay out up to 1.5 billion pounds ($2.3 billion).
On a conference call with reporters, Finance Director George Culmer said there was no need for the bank to set aside funds for potential litigation arising from the Libor affair.
"We are still part of an ongoing investigation and until the regulator is satisfied that that investigation is complete there is no point at this stage in thinking about or putting down a number," Culmer said.
Horta-Osório admitted that the bank could lose up to £800m from the sale of 632 branches to the Co-op but that this would be negated by a reduction in capital needed. But creating the branch network, required by the EU as a result of the £20bn of taxpayer money used to prop up the bank during the banking crisis, had cost £1bn.
The impairment charge of £3.1bn for customers missing loan repayments was down 42%.
Some 45,000 jobs are expected to be lost as a result of the rescue takeover of HBOS in 2008 and a new cost-reduction programme implemented by Horta-Osório when he arrived. Some 4,555 full-time equivalent role reductions were announced in the first half of 2012 taking the total to 6,653 since the start of the new cost reduction programme.
If we look at the core operations of the bank, income is falling by 11% while costs only improved by 4%. Even the near-halving of the impairment charges couldn't help, as management profit slipped 5% from the first half of last year. Overall, the underlying revenue of the bank fell 17 per cent to £9.25bn, as the bank suffered subdued demand for new lending and shrunk its non-core asset pool.
The shares were flat at 29.3p yesterday, down from £5.70 before the crisis hit and under half the 63 pence the government paid, representing a paper loss of around £11bn on the taxpayer's stake in the bank.
I was asked to talk about the role of social media in banking this week, and was a little irritated by the question.
Because social media has a very strong role in some banks.
Then we come to the UK.
Who needs to be social.
Not one of them has an official company blog or, if they have, they’ve hidden it.
This is because I researched a little bit for my presentation by seeing if any of them had one.
And they haven’t.
Now I was reminded of this because, five years ago, I introduced a leading UK bank to Wells Fargo’s Head of Experiential Marketing, Tim Collins, to discuss social media.
Tim was already well into blogs and virtual worlds, and was expanding the bank’s footprint into facebook at the time.
They asked him why he bothered?
His answer was simple: “if you’re not part of the social world of conversation amongst your customers, then they will talk about you negatively and you have no voice to respond. If you engage in the online conversation, then it becomes far more civilised, interactive and interesting.”
There were lots of things discussed.
For example, the UK bank said they tried an internal blog for three months but got so much negativity they shut it down.
Tim responded by saying that Wells Fargo had the same thing from customers at first but, by having a team monitor their social media 24 by 7, they always responded to any negativity straight away with a response explaining why it happened that way.
Customers were far more polite and calm when they saw their rude postings garnered a civil reply; hence it led to being engaged in a conversation. Through conversation, the bank learned a lot more about what frustrated customers. The result is better products and services.
However, it is quite clear that the bank cannot engage in such activity half-heartedly, as you need to be responsive and therefore have people dedicated to social media interaction.
Like a call centre, it’s a response team to online questions and issues.
He also said that now other customers often reply to rude postings, and that their best service agents are their own advocates.
I hear this from many other banks now too.
Finally, Tim talked about the reasons why they first got into social media and it was in part related to one customer who had created a website called wellsfargosucks.com.
Unfortunately, that website came up as the first result in any google search.
Therefore, in order to ensure the right image of the bank was presented, the bank sees social media as a key method of moving the right message to the top of the search results rather than leaving it to negativity from media or anti-bank activists.
So now I come back to my UK bank social media research.
Here’s what I found.
Lloyds Bank – no blog, and mainly investor discussions.
HSBC – no blog, one negative headline in top five search headings.
Santander – no blog, a few negative headlines but at least they put an advert against their name.
Barclays Bank – no blog but great search results!
NatWest – oh dear, dear, dear.
I’ve recently been thinking about headcount cuts.
It’s always hard …
And it's getting harder.
For example, I wrote in August that thousands of bank jobs were being cut, adding up to an expectation of 15,000 City jobs this year.
Each job loss represents a significant loss to the economy, especially those in the City:
“Based upon an average salary of £150,000 and income tax of 50 percent, employer national insurance of 2 percent and employee national insurance of 2 percent, this works out at an average lost tax income per lost City job of £81,000 per year, or a total loss of about £1.3 billion in tax revenue. To put this into context, financial services workers paid a total of £18 billion income tax for the tax year 2009/10, or 15 percent of the UK total, so this year's redundancies alone could lower the sector's income tax contribution by about 7 percent.”
In fact, every bank is cutting … how far could it go?
According to one leading light in the City, Mary Caroline Tillman – shortlisted for Woman of the Year, Head of the Global Financial Practice with headhunter firm Egon Zehnder, and formerly Managing Director and Chief Operating Officer of JP Morgan's European Advisory Business – the losses will rise to around 40% of all City jobs.
In an interview over the weekend with the Independent, Mary said the following:
“The Masters of the Universe are facing a really tough time. The shake-out is only just beginning after the crash. There is a big consolidation still to come, which means there will be far fewer banks; a 40 per cent cut in jobs will be the 'new normal'. This is because of the tougher regulatory environment.”
A 40% job loss in the City would spell disaster.
For example, the article reckons that there are about 360,000 people working in the City and some 670,000 in New York's securities industry (this does not take into account all the ancillary and related services from accountants and lawyers to bar staff and restaurants).
If 40% disappeared in London, based upon my earlier calculations, which would be 150,000+ job losses. A loss of around £13-£15 billion a year in tax revenue … or more.
I wonder whether the government really wants this scenario therefore, and the Occupy Wall Street brethren.
Meanwhile, as the industry does go through its transformation from reckless risk to wrestled risk, it was interesting to see the change Mary sees happening in the core investment community of London.
“The restructuring means a different kind of leader is emerging. They are coming from the more functional areas. You can see that, with risk officers such as Robert Le Blanc at Barclays and Marc Moses at HSBC, who are now at the top … Boards want the finance guys, accountants, risk specialists, those with knowledge of IT and compliance. These are the future Masters of the Universe … and these new bankers are determined to show that banking can be a decent and good business.”
So the Vickers Report has finally crept out into the wilderness.
All 358 pages of it.
Half of it talks about how to increase the competitiveness of banking and the other half about what to do if a bank fails in another crisis.
The latter has garnered all the news headlines, whist the former has been generally overlooked.
More copy has been written about this report than anything else in banking over the past week or so, with a selection of headlines that makes the mind reel. Here’s just a few:
If you want the truth, you can read the full Vickers report, which I’ve been reading this morning and so far have found nothing too surprising, as most has already been leaked.
Here’s a summary of the key points on ring-fencing:
And on creating new competition:
For the most part, I’m disappointed with this report. It’s not that I’m against bank reform, but what is the right sort of bank reform?
What this report appears to do is tread a fine line between bank anger, government need and public input, and comes out on the side of muddle.
It’s already had plenty of flak for this, but let’s pick on a couple of things.
First, account portability. Why hasn’t the ICB included this, as it makes eminent sense as discussed back in December at the ICB meeting I attended.
What the report actually says about this is as follows:
“The Commission recommends the early introduction of a redirection service for personal and SME current accounts (to make account switching easier) which, among other things, transfers accounts within seven working days, provides seamless redirection for more than a year, and is free of risk and cost to customers. This should boost confidence in the ease of switching and enhance the competitive pressure exerted on banks through customer choice. The Commission has considered recommending account number portability. For now, it appears that its costs and incremental benefits are uncertain relative to redirection, but that may change in the future.”
In other words, the cost of using different account numbers between banks allowing portability is too great. For example, if might from RBS to Lloyds with account number 75280025, there may already be someone at Lloyds with that account number. Therefore, to introduce account portability of account numbers, you would probably need to renumber all the bank accounts in Britain with unique ID’s. That’s why it’s been dropped.
But then the report adds more details to this idea (page 218) and shows it is feasible:
“Under account number portability, a customer’s sort code and account number would not change when the customer changed banks, thereby avoiding the need to change any payment or credit instructions. Evidence to the Commission suggested that the effect of account number portability could be achieved through the creation of an ‘alias database’. This proposal is for a new database to be created with a new code for each account that would be assigned to each sort code and account number: a customer would give the direct debit originators (and creditors) they deal with the new code, which would never change; when the customer moved banks, the sort code and account number assigned to the customer’s code would change and nothing else.”
Later on (page 222), it expands on the risks and opportunities of account portability:
“One significant benefit of account number portability (whether done through making existing account numbers effectively portable, or through the creation of an alias database) is that it would remove the cost of switching to direct debit originators, as well as those who make automatic payments into customers’ accounts. However, given the importance of the payments system, it would be critical to ensure that the migration to account number portability did not disrupt the flow of payments or introduce greater operational risks into the payments system.”
In light of a need for bank reform, this would have been a worthwhile aspect to develop now, and it is something left in the report for further evaluation so you never know.
Nevertheless, the big question is whether this would improve competition anyway?
Competition is more about the barriers to entry – governance, licensing, capital, technology etc – and hence, these are more mighty areas … that the report also fails to address.
The report mentions competition 414 times, and yet the main recommendations of the interim report:
... have all been watered down.
Then we move onto ring-fencing, which purely addresses the aspects of what to do if a bank fails.
"Structural separation should make it easier and less costly to resolve banks that get into trouble. By ‘resolution’ is meant an orderly process to determine which activities of a failing bank are to be continued and how. Depending on the circumstances, different solutions may be appropriate for different activities. For example, some activities might be wound down, some sold to other market participants, and others formed into a ‘bridge bank’ under new management, their shareholders and creditors having been wiped out in whole and/or part. Orderliness involves averting contagion, avoiding taxpayer liability, and ensuring the continuous provision of necessary retail banking services – as distinct from entire banks – for which customers have no ready alternatives. Separation would allow better-targeted policies towards banks in difficulty, and would minimise the need for support from the taxpayer. One of the key benefits of separation is that it would make it easier for the authorities to require creditors of failing retail banks, failing wholesale/investment banks, or both, if necessary, to bear losses, instead of the taxpayer."
Living wills and all that aside, the proposal to leave banks as integrated universal operators – good for Barclays – by purely creating a delineation between their domestic commercial and retail banking operations versus their global links is a duck out.
Because it does not address the issue of why banks fail, but just what to do when they fail. This is a positive thing according to some and yes, sure, it's a good thing to know what to do when a bank fails ... but why not try to deal with the core of failure as, even if we know what to do, a bank failure in its investment arm will still destroy value in its overall operations.
Northern Rock illustrates this well where, as a pure retail bank, it failed due to securitising its loans and mortgages in the wholesale markets. Surely these aspects of potential liquidity failure should have been in the report, and how a bank builds an illiquid position that leads to failure, rather than just what to do post the event.
And no, I'm not forgetting that through a ring-fence recommendation increased capitalisation of both the retail and investment operations will help, but an illiquid position is still on the cards and that is surely a point that should have been the core of the reforms, not the post-failure fall out?
Equally as Sir John Vickers has been saying in today's press calls: “the too big to fail problem must not be recast as a too delicate to reform problem”, but is he reforming or just adding insult to injury?
As the action of ring fencing is a unilateral action not being followed by any other major nation right now, it may be the latter.
Renowned former Federal Reserve Chairman Paul Volcker gets to the heart of the matter when he says that he “completely doesn’t understand the British approach, where they can leave all these questions unanswered. They said they wanted a retail bank in the same holding company as everything else. I don’t know what ‘everything else’ means. Is that not a bank too? It’s just a wholesale bank. Who makes the payment system work – the retail bank or the wholesale bank … the philosophy is you are a group of banks that serve the consumers, the retail customer, and that hold their deposits with the central bank and so forth, does not solve the problem with all the other parts of the financial system. I also don’t believe in a firewall or Chinese wall between them, as you need a very high ring fence to stop the deer jumping over.”
Sir John may claim the fence is high, but it cannot be high enough.
When a Barclays investment bank fails, it will still bring down Barclays Bank as Barclays investment banking operations represents 42% of the bank's total revenues (Royal Bank of Scotland generates a third of all revenues from investment operations; HSBC 27%; and Lloyds Banking Group is unceratin as it has no official investment banking arm).
Meanwhile, the costs are at least £4 billion to implement these reforms and the overall programme has really hammered the value of the UK banking sector in the world's financial markets:
With much of the loss of value this year due to Sir John's committee's actions combined with the Eurozone crisis.
So my key question is that we are living in a world where Basel III, G20 reform, European Union Directives along with American restructuring is creating so much imbalance in the global financial system that adding to such imbalance though unilateral action is questionable.
This is corroborated by the views polled by City AM and Politics Home.
“Among just those working in the banking sector, however, support for the idea has collapsed - and while a small majority of bankers still back a ring-fence, net support have fallen from +46% to +15%. This is surely a reflection of recent rumbling in the press on the dangers of such a scheme to the sector.
Those working in the banking sector, however, thought the idea would make no difference in preventing a repeat of 2008, while thinking it would be actively damaging to promoting UK economic recovery, getting banks lending, as well as keeping HQs in the UK.
All in all, the whole area is a cauldron of trouble and messiness that this report has done little to resolve and, if anything, has fuelled more debate about the UK’s sole stance in the face of global regulatory drives.
So what should we do?
We should ensure that we work in harmony with Wall Street on the capital market reforms whilst implementing domestic policies to lower the barriers to entry for new entrants in banking.
The former may be seen as being difficult, but the #1 objective of the UK should be to maintain UK’s attractiveness as a centre for financial services.
That’s the piece that has been most badly damaged by these proposed reforms.
Luckily, it won’t be implemented until 2019 in order to ensure consistency with the developments of Basel III, so delay was inevitable after all.
A few further comments:
Andrew Gray, UK banking leader, PwC, said: “The report from the ICB today sets out a clear statement of the direction it believes should be followed in order to reduce the risks of banking in the UK, increase competition and ensure globally competitive banking based in the UK. The measures recommended will have a far-reaching impact on the way in which banks operate in the UK in future. A key question for government to consider will be the trade-off between improved financial stability and facilitating economic growth. The core proposals revolve around the use of ring fencing of retail banking activities to ensure both the financial stability of the banking sector, but also to ensure the government is not called on to rescue the banking sector in the future. Ring-fencing on its own does not change the risks inherent in banking (except when it comes to resolving failed firms) and the ICB recommends higher capital levels than those proposed by the Basel Committee. The importance of a strong banking sector as an integral part of the UK economy is clearly recognised, as is the need to ensure the UK remains a globally significant centre for financial services. Overall, these proposals, while not unexpected, will represent a significant change to the UK banking landscape. These are detailed proposals which will take time to digest and, in doing so, more questions will emerge. It is too early to assess the real impact on the UK banks and the wider economy. The real consequences will only become clear once the Government decides what is to be passed into law.”
Michael McKee, Head of Financial Services Regulation at DLA Piper, commenting on the Independent Commission on Banking - Final Report, said: "The ICB Final Report has stuck to the line set out in the Interim Report. Most interesting is the detail of how the ring fence will operate. It will focus on deposits of individuals and small businesses - but this is likely to catch a lot of private banking business too. The ring fence looks like it will be quite a "hard" ring fence - a retail bank will have to deal at arms length with other parts of the group and apply large exposure rules. Moreover the ICB sticks to its guns about a minimum level of 10% capital for retail banks and also wants a lower leverage limit than international proposals. Overall, therefore, the ICB has withstood political pressure from the Liberals but has taken a tough line on the content of its ring fence."
Edward Sankey, Chairman of the Institute of Operational Risk (IOR), said: “We are concerned that the Vickers Commission are proposing economic solutions to what they believe are economic problems. However the IOR believes that the root causes of the financial crisis were failures in people, processes and systems, which are the targets of operational risk management. The proposals will not on their own do anything much to reduce the possibility that failures by people, processes and systems will not again threaten banks and their clients. Time and again we have seen that more sophisticated regulation and restriction leads to more sophisticated efforts to find ways through them, or even plain evasion. We have a great opportunity to make lasting reforms that will not only help to ensure a sustainable and profitable UK banking sector, but also strengthen UK economic growth. Unfortunately the Vickers Commission is focusing on the wrong solutions – solutions that will do little to correct the failures in people, processes and systems that preceded the crisis.”
Andrew Wingfield from SJ Berwin’s Financial Institutions Group commented: “The ICB’s proposals totally focus on retail protection and would impose a cost ahead of any bank failure. The costs of restructuring and higher equity capital levels will place returns under further pressure and the ICB’s proposal will likely be a Herculean task given that people and IT systems are intertwined within banks. The key recommendation (in our view) is around a clear message to UK banks to ring-fence their operations with the tone of the political debate already showing signs of an irreversible process and the Government committing to immediate steps towards implementation. Over the next few weeks, it will be interesting to see whether support for the recommendations wanes as the party conference season approaches. However, the message is softened by a long final implementation deadline of 2019, which is intended to synchronise the timeline with the implementation of new international standards under Basel III. In our view, all Banking reform measures adopted by the UK authorities need to be carefully analysed in order to ensure that the full consequences on the economy and the recovery of banks’ ability to support customers is understood.”
There’s been quite a lot of coverage recently of the British Bankers Association’s (BBA) report about bank branch closures in the UK.
Based upon the stats, UK banks are closing three branches a week. That still leaves over 9,000 branches out there, but they are shrinking.
The reasons are many – cost efficiency, movement away from remote locations, operational overheads, etc – but the clear trend is away from branch and towards automation.
That being said, there are still branches out there and, as folks who read this blog regularly will know, a debate about their value always ends up saying that banks will need branches, just not so many.
But the reason for posting this is two-fold.
One is to repeat the BBA’s stats.
The big names – Santander, Barclays, HBOS, Northern Rock, Royal Bank of Scotland and NatWest – had 9,496 high-street outlets between them in 2009 but 187 closed last year, cutting the total to 9,309.
HSBC closed the most, with 58 of its 1,369 branches disappearing last year; the trend has continued this year bringing this down by a further 79 to 1,290 branches today.
Part of the reason for this is that there are 44 million internet banking users registered in the UK, according to the BBA’s stats. As more and more people are engaged in self-serving online, less and less use branches and hence they are not needed.
That does not quite stack up with the Office for National Statistics (ONS) figures however, which show that around one in four households still does not have internet access:
"In 2010, 30.1 million adults in the UK (60 per cent) accessed the Internet every day or almost every day. This is nearly double the estimate in 2006 of 16.5 million. The number of adults who had never accessed the Internet in 2010 decreased to 9.2 million, from 10.2 million in 2009. There were 38.3 million adults who were Internet users."
Even worse are the demographics, which imply it’s the young and wealthy that the banks now reach whilst ignoring the old and infirm.
For example, among the over-65s, just one in three use internet banking compared with two thirds of those aged 25 to 44.
This stacks up with my recent analysis of the ING Direct acquisition by Capital One, which shows that ING Direct’s demographics are skewed heavily to the young and wealthy, whilst traditional banks are directed more towards financial inclusion and the elderly.
What this means long-term is that some banks will want the old and wealthy, the young and the poor; whilst other banks will want the young and wealthy, the old and the digital.
These aren’t simple demographics however.
Banks will appeal to different audiences based upon their channel mix, service offer, customer engagement in person and remote. Some will be heavily branch oriented whilst others remotely focused, but they will each find a niche.
The only change will be that there will be far more niche players, rather than the homogeneous branch based grouping we have today.
This was a question posed to me by Sky News, and the answer is: however much you want to report.
This is based upon the fact that there are lies, darned lies and statistics, and you can manipulate the spend, exposure and loss for each taxpayer any which way you choose.
For example, the National Audit Office said that we spent £850 billion on the bank crises in 2009.
That would equate to a £26,562 and fifty pence spend by every taxpayer in the UK.
Those figures are broken down into:
But the £26,562.50 figure is a total exposure, not losses or actual spending.
So then we can parry this down and look specifically at figures such as the share prices of RBS and Lloyds.
Again, there are different stats, e.g. £76 billion above, £65.8 billion in other news reports and £62.62 billion according to the UKFI.
These figures vary as the share prices are based upon differing amounts gross versus net, with the UKFI taking the net figures in their annual report (well worth a read), so I’ll do the same (in the Sky interview I was using other stats).
According to those figures, the UK taxpayer owns £45.22 billion of RBS (83%) and £17.42 of Lloyds (41%).
RBS shares were trading at 50 pence per share when the government intervened, and Lloyds were 74 pence. The shares are now 32 pence and 40 pence respectively. So you could say that the loss on paper for just these two banks is:
So, on paper, these two banks have lost over £21.5 billion, or around £700 for each UK taxpayer.
Then there’s Northern Rock, Bradford & Bingley et al on top.
So the figures of how much this crisis has cost can vary from anything as low as £700 to over £26,500 per person.
The truth is that it doesn’t actually matter but, for the sake of argument, Sky News put the figure at over £3,500 per person.
This is based upon:
The figures all come from the UKFI report, and work out to be £3,562 per taxpayer in exposure.
Bear in mind however that these are not losses, but the cost to the taxpayer which may be recouped.
So you can see the lies, darned lies and statistics view of the world.
I could spin the numbers to be anything from a few hundred pounds lost for each taxpayer to over £26,000 exposure for everyone.
The more important question is when will the government and taxpayer recoup these costs, if ever.
I have said in previous posts: just before the next UK general election.
I’m now not so sure as, to recoup the investment made, the UKFI originally stated that the average buy-in price for Lloyds would need to be at £1.226 per share and 50.5 pence for RBS.
Hmmmm ... we are a long way from those numbers right now and the question is will they reach these levels any time soon?
I originally thought yes but, with a double dip recession and other clouds on the horizion right now, it’s more likely that this will be a waiting game.
A long one.
So today marks the start of the bank reporting season in the UK which, based upon last week’s results in the USA and Europe, will be pretty bleak too.
First, we have HSBC which is a mixed bag of news.
According to the Telegraph, HSBC will report “a profit for the first six months of the year of $10.9 billion, becoming the first of the UK's major banks to announce its interim financial performance.
“The profit figure, which means HSBC made nearly $1.7 billion of profit in each of the first months of the year, is slightly down on the same period in 2010 when the bank reported a before-tax profit of $11.1 billion.
“HSBC currently employs 335,000 staff around the world and the redundancies would equal about 3pc of its total workforce.
“Mr Gulliver wants to reduce HSBC's cost income ratio to between 48pc to 52pc. In the second half of last year the bank reported a cost income ratio of 60pc and in the first six months of this year analysts at Credit Suisse estimate this has fallen to 57pc.
“Profits from HSBC's personal financial services business are forecast to have more than doubled to $3.2 billion compared with the same period in 2010, largely as a result of reduced losses in the bank's North America business, which lost $1.5 billion in the first half of last year …
“Global banking markets, HSBC's investment banking division, is expected to have recorded about a £1 billion fall in profits compared with the first six months of 2010 at £4.6 billion.”
One point of note is how HSBC is restructuring, started with the sale of its 195 branch network in upstate New York to First Niagara Bank for $1 billion (£609m).
HSBC also recently sold its Russian business and further sales of international retail banking businesses are considered likely, though the bank has ruled out selling any of its UK, French or German operations.
One point to note in HSBC’s globality is the retrenchment of operations, and the refocusing from shrinking markets – the USA – to growth markets – Asia. For example, although profits were boosted by growth in emerging markets, there were still write-downs in the USA of around $3 billion, two-thirds the figure of last year and adding to the cumulative pot of near $70 billion losses on Household since its acquisition in 2003.
This is why Stuart Gulliver announced in May, that HSBC would slash costs by up to $3.5 billion by 2013 with the savings “ploughed back into fast-growing markets around the world, especially in Asia. The lender has already said it would be hiring at least 2,000 extra people in mainland China and Singapore over the next five years, as it seeks to tap the fast-growing Asia Pacific market.”
Apart from HSBC, and looking around the other banks, the outlook is also grim.
Lloyds and RBS have seen their shares plunge 30% and 17% respectively in the last six months alone, while Barclays' shares have plummeted 26% and HSBC has lost 14%.
Much of this is down to severe downturns in trading, with some bulge bracket firms reporting that year-on-year trading was down by over 25% in June.
At Barclays Capital, the investment banking arm of Barclays, analysts estimate that profits could have fallen by about 40pc to just over £2 billion in the first half of the year compared with the same period in 2010. In 2009 the division reported revenues of £13.7 billion, up nearly 90pc on 2008. A year later revenues had dropped by more than a third to less than £9 billion and this year the forecast is for a fall of another 8pc to around £8.1 billion.
Taxpayer-backed Lloyds Banking Group is expected to report pre-tax profits of £1 billion on Thursday, a steep reduction on the £1.6 billion reported a year earlier. Losses in Ireland and Australia, although still high at £2.2 billion, will be £1.4 billion lower than the second half of 2010.
Royal Bank of Scotland closes the week with its results on Friday, which are expected to reveal £611 million in reported profits, down 19% on the previous year. Much of this will be due to disappointing investment banking results, down 31% over the same period last year. This represents a more than halving in profits in its global banking and markets business to £1.3 billion. Nevertheless, RBS will show overall business lending is up, driven by increased borrowing from large corporates.
Analysts estimate the combined pre-tax profits of the so-called "casino banking" divisions at Barclays, HSBC, Royal Bank of Scotland, Standard Chartered and Lloyds Banking Group fell from £11.1 billion in 2010 to £9.1 billion in the first six month of this year.
All of this means lots and lots of job losses.
Apart from the 10,000 at HSBC, there were 15,000 job losses announced in June by Lloyds Banking Group, taking the total number of redundancies at the bank since its rescue by the taxpayer to about 40,000. Royal Bank of Scotland has already shed 28,000 staff since the financial crisis started.
Barclays has been shedding staff for months, with Barclays Capital, its investment banking arm, cutting about 600 people worldwide since January and its retail business losing almost 2,000.
At UBS, as many as 5,000 jobs are set to go across the group, including the bank’s wealth management arm. Credit Suisse is eliminating about 2,000 positions, largely in its investment bank.
Goldman Sachs, the US investment bank, was the first to announce a substantial cull of jobs last month, saying it was trimming 1,000 posts after a poor performance by its fixed- income trading division.
The overall expectations are that as many as 15,000 City-workers, or about 5pc of London-based financial services staff, will lose their jobs before the end of the year, resulting in a drop of more about £1.3 billion in lost income tax revenues for the Exchequer.
This is based on an average salary of £150,000 and income tax of 50pc, employer national insurance of 2pc and employee national insurance of 2pc, this works out an average lost tax income per lost City job of £81,000, or a total loss of about £1.3 billion in tax revenue.
To put this into context, financial services workers paid a total of £18 billion income tax for the tax year 2009/10, or 15pc of the UK total, so this year's redundancies alone could lower the sector's income tax contribution by about 7pc.
It’s not all bad news however, as Standard Chartered is set to announce pre-tax profit of around $3.5 billion, up from $3.1 billion in the first half of 2010. Again, this reflects the strength of Asia.
Also, the taxpayer “made a net profit of £339.8 million pounds in the first half of 2011 from the assets they still hold in Bradford & Bingley Plc and Northern Rock (Asset Management) Plc.” So that’s not so bad then.
Meanwhile one Spanish Bank, Bankia, has offered the ECB Cristiano Ronaldo as collateral for their loans. What is the world becoming?
The above is an amalgam of a variety of articles as follows:
Talking about risk and innovation in creating the world’s first 1,000 miles per hour (mph) car, is like talking about changing the core systems in a retail bank.
You just don’t do it or, if you’re going to try, it’s incredibly tough and challenging.
In fact, in retail banks, it’s even more challenging as the first issue is how to get the car up and running at 1,000 miles per hour then, once it reaches full speed, the focus is to keep it there as it then can never stop.
That’s why banks never change core systems, as the difficulty is how to change the engines on 1,000 mph car when it’s travelling at top speed, an analogy used many times in many contexts: changing the engines on a jet at 40,000 feet being the usual metaphor.
So how do you change the engines of the bank at full speed?
Well it has and can and is being done, but most of the time it’s being done badly.
You see, once a core system is in play, that’s it. It’s in play. It can never change.
You place all of your customers live onto those systems and then the focus changes to: how do you ensure this system never stops.
That’s why we talk about five 9’s – 99.99999% high availability, fault tolerant uptime.
Any downtime is visible y’see.
The customers notice.
They complain if an ATM can’t dispense cash one day or if the internet banking site stops for five minutes.
Imagine when this occurs for more than a day.
So banks just don’t do it.
They have the car up and running at 1,000 mph, and know that any slowdown will irritate their customers so they just keep the car running.
All the focus is upon operational uptime and business continuity.
None of it looks for innovation or change.
In fact, once a core system is up and running, there is an issue with innovation.
Any new channel, like mobile, is a potential disruption to the core system.
This is why new things are appendages to the core system.
And, as many banks core systems were developed in the 1970s, it is the reason why ATMs, call centres and the internet are all add-ons to the basic account processing in branch structures set up forty years ago.
Now some brave banks have been changing core systems.
I wrote about this the other day, when talking about the migration of Abbey and Alliance & Leicester to Santander’s core system migration and the Australian bank debacle of NAB and others. Santander's problems with migration issues are well-known and I've been blogging about them for over three years now.
In the case of the latter, the change was introduced due to the mess of forty year old spaghetti. In the case of the former, it’s Santander’s ambition to have all the global bank operations running on one standardised system. Therefore, as they acquire, they transition each acquired bank onto their core system but at a high cost.
The cost to Santander is that their customers hate them, but they stay because it’s too difficult to switch banks and Santander offer great interest rates.
Another bank undergoing similar upheaval is the Nationwide Building Society.
Their three-year old project to move the bank onto a core banking platform from SAP has not been without issue but, so far, not much of this has hit the headlines.
Unlike Tesco, the latest example of a bank crashing its core systems during a recent migration project.
Tesco, who pride themselves on being good with customers, have just seen their reputation take a big hit as thousands of customers were locked out of their accounts.
In mid-June, Tesco Bank migrated their customers from the Royal Bank of Scotland’s (RBS) systems – who had been their banking partner for the last fifteen years – across to their own platform, as Tesco is now going it alone with their own banking licence.
The whole thing was messed up, with the bank initially saying it was a customer issue with Internet Explorer and that customers should be mindful of how they access the bank’s service.
This soon changed as 2,500 angry customers contacted the media. Soon after, the big guns were rolled out, with CEO Benny Higgins saying that he would ensure any losses were compensated and that customers would be looked after.
They still got a lot of things wrong, e.g. Tony Collins wrote up a good list of the do’s and don’ts of the Tesco farce, but a few people may have missed something fundamental in this process.
Not sure if true, but someone did say to me the other day that they suspected the issue was migrating from a system where those who worked on that system would be redundant.
In other words, the RBS IT staff who support the old system that Tesco is leaving would have no interest in helping the process.
Sounds a little bit unprofessional to me, but you never know.
Either way, moving a system from one old system to another is hard; moving a system from a base that is bespoke, specific and old, to a new system that is global, generic and bold is harder; and moving from a partner who you’ve divorced to a brand new shiny system is the hardest.
Maybe this is why Lloyds Banking Group is moving the HBOS legacy systems to their own legacy core systems. No new platform, no shiny upgrade, just getting one 1,000 mph car across to merge with another one.
Still not easy but watch the headlines about Lloyds in September as the HBOS customers are migrated to their core system.
I’ll place a bet today that you won’t read lots of scary headlines about their migration.
It may be pretty dull stuff to move legacy to legacy, but it’s very safe and, for a bank running at 1,000 mph, that’s what many need.
I was talking about lots of things yesterday but one conversation sticks in my mind more than any other: who will Lloyds sell their branches to?
This is all wrapped up in a debate with the European Commission dating back to 2008, when the UK government flouted competition rules to approve the emergency merger of Lloyds TSB and HBOS. This was viewed as anti-competitive by the European Commission, but was approved under the caveat that a restructuring plan was put into play.
The restructuring plan, agreed in November 2009, “contains a divestment package in Lloyds Banking Group's core business of UK retail banking as a measure to limit the impact of the aid on competition. The divested entity will have a 4.6% market share in the personal current account market gained through a network of at least 600 branches.”
The aim of this sell off divestment, called Project Verde by the bank, is aimed at creating a new competitor or to support the growth of a smaller existing competitor in the UK retail banking market.
The Commission argues that this will “remove the distortions of competition created by the aid”.
In other words, it’s a bit like the RBS sell-off of branches to Santander or the ING Direct USA sale to Capital One. Something that Lloyds, RBS and ING didn’t want to do, but was forced upon them in exchange for their bailouts (slightly different to the American approach to TARP mesays).
Anyways, back to Lloyds.
Eighteen months after the plan was approved by the Commission, the divestment is in play and 632 branches are being organised for sale, equivalent to 22% of the bank’s UK branch network. Bids will be received by the end of July and will then move into the Phase 2 due diligence process for the shortlisted few.
The details were announced at the end of May with a press release from the bank:
“The Verde business will have around five per cent of the UK personal current account market, over 600 branches and will become the seventh largest bank in the UK. It will bring together the Cheltenham & Gloucester business, Lloyds TSB Scotland and over 250 branches from the Lloyds TSB network in England and Wales.”
Paul Pester is the new Chief Executive Officer of the Verde business. In the press release:
“I am delighted to be in the position of shaping and growing a new business which will serve over 5 million customers and service over 8 million accounts. The new bank will be an exciting addition to the UK market and will be focussed on promoting competition and delivering great products and services to its customers.”
Paul’s senior team, most of whom will transition across to the acquisitive firm, will be:
Peter is currently the Network Director for the Bank of Scotland and Lloyds TSB Scotland branch networks. He is also the CEO of Lloyds TSB Scotland plc.
The divestment will complete before November 2013, when all the customers and branches will move across to whoever the buyer is.
And there’s the rub: who will buy them?
We have the normal suspects: Virgin and Tesco.
Virgin may have a challenge if they want to buy the Verde business due to the history between Paul Pester and Richard Branson.
Before joining Lloyds in 2005, Paul was CEO of Virgin Money for five years. He left in a bit of a dispute with Virgin Chief Branson, when the bearded one pulled a leaving package that had been agreed, and left Paul with something that was half of what it would have been. Something that still grates with Paul, although I’m sure he’s big enough to get over it. However, it does mean that the deal will be negotiated really hard and, having seen the performance with Northern Rock back in 2008, Virgin never pay over the odds for a business so I think they’ll back off.
Tesco doesn’t need these branches as they have stores in most of the strategic locations they need, so forget them.
National Australia Group, who own Clydesdale and Yorkshire, or a similar smaller existing competitor … not really. I cannot see any small bank wanting to take on board 632 new branches from a large competitor.
After all, even though the sale is going to make them a big player, how do you check these branches are decent? Sure, the European Commission ruling stipulates that they must provide full coverage representing the demographics and operations of the bank, and are in decent geographic locations, but that isn’t easy.
The integration of the branches, the staff, the processes, the products, the systems and everything that goes with it won’t be easy.
There’s another wrinkle in the process of the sale here as well, as highlighted by Robert Peston of the BBC:
What makes a disposal close to impossible is that Lloyds has been instructed by the European Commission to sell £68bn of assets, largely mortgages, and customer deposits of nearer £35bn. So there is what bankers call a funding gap of more than £30bn. The point is that any buyer would have to pay Lloyds £68bn for the assets, but some £35bn of this would be covered by the £35bn of deposits that are being transferred to the successful bidder. The remaining £33bn has to be raised from investors in the form of regulatory capital and new debt. Or to put it another way, any successful bidder would have to borrow at least £30bn.
This is why Lloyds went out and got some further £15 billion of funding back in March I guess, but it’s not enough to cover the funding gap Peston highlights.
So a small UK competitor swallowing such a massive divestment won’t be something any of them would want to take on board that easily.
This rules out Metro, Newbank and others too. After all, imagine taking on 632 branches. Not only do you need the massive capital funding to cover the deposit base, but you also probably need a further 25% or more of the price to invest in a branch refit and rebranding.
So then you start to look overseas for buyers.
Santander would have been a contender a few years ago, but they won’t buy the sell-off … they’ve already become a mainstream UK branch-based bank through acquisitions from Abbey, Alliance & Leicester, Bradford & Bingley and RBS, so an additional 632 branches won’t help.
Maybe another EU bank?
BBVA? Probably not, as they’re not here now and strategically look to Latin America.
Deutsche? Too busy bailing out Greece.
BNP Paribas? Un banque francais dans Grande Bretagne? Sur mon corps mort.
Overall, I would say that Europe has enough domestic issues to warrant zero interest in buying a new UK bank divestment in a zero growth market.
So then we look to further shores.
Citi, JPMorgan or Bank of America?
It would be interesting.
A US bank with the American culture of innovation, marketing and service, would be good for the UK. That’s what Metro Bank are bringing over here. But Citi, JPMorgan and Bank of America are still grapping with domestic issues too and, as mentioned, buying a new UK bank divestment in a zero growth market is not attractive.
So to Asia.
Asian companies are buying Western firms … but only those that offer strong brands or manufacturing capabilities to sell back into Asia where the growth is.
So buying a Cirrus or Volvo makes sense, but buying a UK bank in a UK market with UK customers and UK growth rates?
So there’s no obvious buyer out there.
Add onto this that the Vickers Independent Commission on Banking (ICB) reforms state that even more branches should be sold than those required under the European Commission ruling – possibly up to 1,000 branches rather than 632 – and you can see a real muddle of challenge here.
If the bank resists this requirement then an antitrust probe could ensue, which would block government plans to begin selling its holdings in the bank next year.
The ICB recommendations are yet to be finalised, but this could be an extra spanner in the works for the Verde divestment plans.
The deadline for the sale of the branches is November 2013.
I won’t be holding my breath and neither are Lloyds, as they’re already talking about having to float this off as a separate business:
“The sale has always been part of what we call a ’dual-track’ process. We are obviously looking for buyers but we can do an initial public offering if we need to. Clearly, people are showing a great deal of interest in the branch network but we need to ensure that we achieve the maximum value for our customers and our shareholders.”
Nothing simple here then.
Final, final point.
What have branches got to do with competitiveness anyway?
ING Direct USA became one of the largest banks in America without a large branch network. That's why they're called 'Direct'.
Equally, some would claim branch is past competitiveness whilst direct is future ...
Source: Capital One's presentation on the acquisition of ING Direct USA
After the bank reporting season in the UK last week, the most notable row that has emerged – alongside bonuses and a lack of lending – is the lack of taxes banks pay.
Banks are remarkably adept at being tax efficient – or should we say, tax avoiders – and this has been known for years. It is tolerated by governments as the taxes they avoid are all legitimate accounting techniques to minimise corporation tax whilst, on the other hand, they are big payers of national insurance contributions, pay-as-you-earn and other employee earnings-related taxes.
This conundrum puts governments in a bind: if they clamp down too hard on their banks, then they lose a possibly major chunk of tax revenues. However, by not clamping down on the banks, they lose a major chunk of tax revenues anyway.
This dilemma is the one facing the UK government in particular, as they see a dysfunctional banking system that they want to tax heavily but they know that, if they do, the banks will leave.
This was clearly demonstrated by the often mooted rumour about HSBC relocating to Hong Kong – that’s been around since Michael Geoghegan’s office moved there two years ago, although it’s interesting that new CEO Stuart Gulliver has clearly said the office should be in London – and Barclays to New York.
Such sabre-rattling frightens the likes of George Osborne and Vince Cable, but does it frighten the likes of Mervyn King and Sir John Vickers?
Probably not, as Mervyn King has been quite outspoken over the weekend about bankers bonuses and poor treatment of customers whilst promoting the idea that banks should be split between boring banking – retail and commercial – and casino banking – investments. A view that appears to be increasingly endorsed by Sir John Vickers, who will provide the regulatory framework for long-term bank reform later this year.
If it does go this way – higher taxes on bonuses and salaries, the forced split of proprietary trading (the casino bit of investment banking) and general restructuring, then be assured that it will mean the banks will relocate.
Not Lloyds and RBS – the government owned banks – but the big two of the big four: HSBC and Barclays.
Now, is this a big loss?
Yes and no.
It comes back to the taxation piece.
According to a report by Pricewaterhouse Coopers, banks more than pay their way in the UK economy.
The industry contributed an estimated £53.4 billion to UK government taxes in the 2009/10 financial year, accounting for 11.2% of the total UK tax take.
The figure, which excludes the 50% top rate of tax and the Bank Payroll Tax, is down by £8 billion from the previous fiscal year but the sector has overtaken North Sea oil and gas to become once again the largest payer of corporation tax in 2010.
The sector employs over one million workers which helped to generate £24.5 billion in employment taxes.
That’s slightly less than the amount stated by the banks in Project Merlin’s documentation (HM Treasury published summary, pdf document), where the banks say they will “contribute a cumulative £8 billion of total tax take (covering direct and indirect sources, including the Bank Levy and VAT) in 2010 and, on the same basis, £10 billion in 2011.”
But what’s £45 billion here or there?
The real issue is that the banks can easily offset tax liabilities based upon clever accounting.
For example, leading accountant Richard Murphy writes that the UK banks received an effective subsidy of £19 billion, by writing down this amount as deferred tax liabilities due to expected losses in 2008:
“If some £19 billion in tax might not be paid as a result at some time in the future, there is an extraordinary double subsidy going on for these banks. Not only were their losses underwritten by the state in 2008 (and in most cases they still are receiving some form of state support, if only by way of asset guarantees), but they will now receive a second round of subsidy when over years to come they will offset those state subsidised losses against the profits they might now make only because they have been saved for the benefit of their shareholders by the UK government.”
So there is some issue here about tax isn’t there?
It’s one raised often by the Treasury Select Committee and, in particular, by campaigner MP Chuka Umunna who asked Bob Diamond in the last meeting how many offshore companies the bank had in global tax havens.
About 300, Bob Diamond answered.
Similar questions are being raised by analysts about Lloyds and HSBC.
Ian Fraser writes a good summary of the analysis of Lloyds results over on Naked Capitalism, and the point made is that creative accounting can make any bank look good.
Lloyds were buoyant about rebounding from more than £6 billion in losses in 2009 to a £2.2 billion profit in 2010 … except that the statutory profit was a loss of £320 million.
There are many definitions of profit.
Charges of £1.65 billion as the cost of integrating HBOS with Lloyds, a £500 million purse to reimburse mortgage customers for over-charging and a £365m loss on the sale of two oil-rig subsidiaries had been stripped out of the ‘profit’ figures.
There are many definitions of profit.
There is also a thing called “fair value unwind”.
In Lloyds accounts, they have a specific area relating to the HBOS acquisition representing fair value, and the “fair value unwind represents the impact on the consolidated and divisional income statements of the acquisition related balance sheet adjustments. These adjustments principally reflect the application of market based credit spreads to HBOS's lending portfolios and own debt.”
In other words, it is the write down of what was over-valued in the HBOS takeover and, as a result, higher valuations on HBOS assets and business lines since the deal was done had added £3.12 billion to Lloyds’ headline pre-tax figure.
There are many definitions of profit.
There was a further £7.9 billion of largely unidentified ‘available for sale’ assets also moved into a newly-created accounting basket of ‘held to maturity’ assets as part of the “fair value unwind”. This is a good move as such assets don’t need to be marked to market, which can also improve the accounting view.
There are many definitions of profit.
HSBC has faced similar questions about taxes from US authorities and UK activist groups, whilst Royal Bank of Scotland doesn’t have to worry about profits right now – they made a £1.1 billion loss – but they don’t have to worry about taxes either: “RBS finance director Bruce van Saun also admitted today the bank would pay no corporation tax again in 2011 as it has deferred tax assets of £6.3bn it can use up from previous losses before paying any tax.”
All in all, this new dialogue is quite concerning as transparency in bank accounting is hard – there are differences between USA and International Accounting rules for example, between GAAP and IFRS, and then there are all these complexities layered on top between mark-to-market, fair value, liabilities and impairments, on balance sheet and off balance sheet, and so on and so froth.
Which finally brings me to Basel III.
Why does this report worry me?
Checkout the management summary:
“We believe that changes in regulations for bank capital are a ‘game changer’ for the sector.
“The proposals from the Basel Committee published in December 2009 will increase the quantum of capital in the system, improve its quality, force out complexity from balance sheets and ultimately drive down ROE.
“We undertake a thorough analysis of what happens to the banks’ capital in an attempt to replicate as closely as possible the anticipated findings of the Basel Committee’s own impact study, due H2 2010.
“The results are very interesting.
“The UK banks Lloyds and HSBC are significantly impacted by the proposals.
“We see Lloyds, in particular, having a new Core Tier ratio of only 4.4% by the end of 2012.
“The fall is mainly due to the full deduction from common equity of investments in other financial institutions of £10bn (mainly insurance), which under the present FSA transition rules, is only deducted at the total capital level (not 50:50 from Tier 1and Tier 2 capital as for most other banks).
“Basel III is essentially crystallising the problem that Lloyds has been able to get away with for years of double counting the capital in other financial entities on the group balance sheet.
“We also see HSBC’s Core Tier 1 ratio falling to 6.0%, significantly below peers and in line with what we would deem to be an appropriate regulatory minimum.
“The reasons for the substantial fall in the Core Tier 1 ratio are more varied than for Lloyds and arise mainly from the deduction of negative AFS reserves, the deduction of minorities, the increase in market risk weights and the deduction of investments in other financial entities.
“For the last point, HSBC has, like Lloyds, taken advantage of the FSA transition rules currently in force and opted to deduct investments in financial entities at the total capital level rather than 50:50 from Tier 1 and Tier 2 capital.
“We believe that management may ultimately desire to raise more common equity to obtain a capital buffer and regain parity with peers.”
Be assured that bank accounting rules are under intense scrutiny, and will be more so in the future.
But no bank is going to appreciate Basel III adding layers of excess capital requirements to their already over-burdened balance sheets.
For example, take note of this quote from Karen Fawcett, Senior Managing Director and Group Head of Transaction Banking with Standard Chartered Bank (pdf of SIBOS Issues, October 2010): “If the regulations are implemented as they are currently written, we could be seeing a 2% fall in global trade and a 0.5% fall in global GDP.”
What the banks are really saying is that if Basel III is implemented as it is currently written, and if banks ever move to accounting practices where apples can be compared with apples, then global trade will decrease because the lubricants of trade – leverage and risk – will be curtailed.
Is that such a bad thing?
Blog inspired by Ian Fraser’s tweets
So along I go to the Independent Commission on Banking’s (ICB) Hearing this week on bank competition and financial inclusion.
The evening is the last of several meetings that have taken place across the country, as part of the Government sanctioned Independent Commission review of the structure of the banking market.
For those unfamiliar with the ICB, they are the idea of George Osborne, Chancellor of the Exchequer, who asked the Commission to “consider structural and related non-structural reforms to the UK banking sector to promote financial stability and competition.”
Chaired by Sir John Vickers, former Chief Economist at the Bank of England and a Director General/Chairman of the Office of Fair Trading, the ICB is due to make recommendations to the Government by the end of September 2011.
The evening I attended explored several connected issues of competition, choice and financial inclusion and it didn’t start too well I must admit as, having trailed into London, the organisers said that I wasn’t on the list.
This was after a confirmation from the organiser saying I definitely was on the list.
However, I hadn’t printed it off – no-one had! - so a small tete-a-tete ensued.
It was resolved amicably, with a clear statement that as the evening was organised as apart of government enterprises inc., it was not surprising that they couldn’t organise a drink-up in a brewery.
Or, in this case, a hearing in One Great George Street.
The panel itself consisted of several esteemed individuals:
All ably hosted by BBC Money Box presenter and former FSClub keynote, Paul Lewis.
The evening began with a poll of the 100-strong audience to see what sort of instituainots they represented.
The second instant poll question asked whether this audience thought it likely that they would switch their main current account within the next two years:
This compared with Consumer Focus research of over 2,000 adults, which found only 7% had switched and 17% had considered. Just under a quarter of the general populous therefore had switched or thought of switching, compared to a third in the room last night.
The audience were then polled as to what would increase competition in the banking sector:
This is a bit strange as websites like MoneySupermarket and MoneySavingExpert provide the number one above and have done for a while, and yet folks still don’t switch.
The second item is also not going to increase competition as I often blog about league tables showing service levels and complains. There are loads out there.
So I’m sorry but that question was just bosh.
On to the next one: what would help low income customers the most?
Hmmm ... I’d have thought money would help them the most.
Finally, the audience were asked how much they would be willing to pay to have bank accounts with fair and transparent charging if you are overdrawn.
I wasn’t sure how useful these questions were, but some of the answers did interest, as in a quarter of customers would be happy to pay £10 or more a month for a transparent charging structure.
Funnily enough, I pay about £20 per month for an account that lets me go overdrawn as much as I want with no fees. That suits me as I don’t have to worry about my account balance. Some may say that’s a lot, but there’s all sorts of other account perks, such as travel and gadget insurances for free, concierge services, direct access to a relationship manager, etc.
My bank calls this: ‘Private Banking’.
I call it: ‘Painfree Banking’, because I don’t have to worry about my account.
Ah well, guess I’m in their sought after category rather than being some low-income underbanked and can’t afford such accounts ... who then get merrily stiffed with charges.
I say the latter as the polling led to a debate that pretty much had the theme: how come banks allow painfree banking for the rich whilst stiffing the poor.
For example, when discussing why consumers don’t switch accounts, Martin Lewis suggested taht it is because the current account is the most service oriented of all bank products, but that it is subsidised by the banks cross-selling higher margin and fee-based products once they have the customer onboard.
Not quoting Martin accurately, but his view went something like: “Apathy, ignorance and inertia delivery most of the bank profits and it is a disgusting disgrace that we don’t have financial education in schools to overcome this.”
As you can see, it sets the tone for Mr. Moneysavingexpert.com. In fact, he went further to state that any system that gave free services to the rich whilst charging the poor to subsidise them, had to be wrong.
This set the tone for the evening and rather than being a nice discussion that was balanced, it felt far more like a bank bashing session from consumerists and the public if you ask me.
For example, Danielle went next.
Now she was far more considered by comparison, and focused upon financial inclusion, stating that 1.5 million adults in the UK have no bank account today, although six out of ten had one once before.
Part of this is because of the hidden charging structure which, by nature, attracts those with money whilst punishing those without. For example, the average savings on bills when paid by direct debits amounts to over £250 per year, but you need to have a house, electricity, telephone etc, to get those savings. Otherwise, the average charges on an account each year is £140, and that’s where the underbanked get stung.
This concurred with Martin’s point, but was articulated slightly less emotionally and more rationally.
Paul Lewis emphasised that the issue is more to do with the introduction of free banking in the UK in the 1970s which, forty years later, has led to a system where “they give you gifts to attract you in, and then sell you everything at very high profit margins to rake it back”.
Martin Taylor admitted that “in private, many senior bankers would love to move away from the free banking and charging model, but not of them has the courage to be the first to change it.”
He also underlined that when free banking was introduced in the UK, it was because the average fees paid were £100 per year. Then interest rates rose and banks could reduce these fees. By the time free banking came into play, banks were trying to compete in an interest rate environment at 17% and fees had become a barrier to gaining business.
Now that’s changed, and if anyone had predicted that banks would be offering free banking when interest rates were 0.5% forty years later would have left those 1970s bankers incredulous.
Bearing in mind that he was Chief Executive in the 1990s, he knows what he’s talking about.
A member of the public then said: “what we need is a whole new banking system, rather than propping up one that doesn’t work.”
Danielle then brought the subject back around to the unbanked and underbanked, stating that low income groups purely want to have control over their money. For example, many are reliant on payments from the government or from a partner and, if those payments arrive late which is out of their control, they don’t want to get high charges for someone else’s forgetfulness, which is what happens today.
Equally, when they want to borrow money, they usually only want £50, £100 or £200. Banks don’t cater for those needs, as they want to lend £1,000 or more. Therefore, there is mismatch in the system.
I thought that was a very good point.
Paul Lewis suggested that control was hard because electronic payments make it so easy for money to flow in and out of your account that you can’t keep up with it.
Martin Lewis countered by saying that electronic actually gives you more control over your money, as mobile and internet allows you to check 24*7 what’s happening.
Paul countered by saying that most low-income families don’t have mobiles or access to the internet.
Personally, I think Paul doesn’t realise that many low-income families have a mobile today.
Mike O’Connor chipped in that low income communities are meant to be served by Post Office Banking, which is not providing access to a bank through a Post Office but actually have a state-owned and run Post Office Bank.
And Mark Lyonette of the Credit Unions, said that it was clear that Credit Unions worked for these communities with half of Northern Ireland’s citizens having a Credit Union account (450,000 accounts), and 5% of Scotland of which 20% are in Glasgow.
As you can see, the conversation was wide-ranging and, although structured, felt fairly inconclusive to be honest.
It was more of a talk shop than anything which showed a conclusion.
Having said that, I walked away with a few observations.
First, the traditional banks serve those who have money well. For those who want flexible banking, we are willing to pay a monthly fee and it gives us painfree banking.
It may be subsidised by those who pay high fees and charges, but those are the people who are often just messy with their money, according to Martin Lewis, rather than structured and in control.
Second, for those in low income communities who are unbanked or underbanked, it is because banks don’t want them. The question then is why force banks to look after them? We need alternatives instead, and if those alternatives are credit unions or the post office, all well and good.
Third, if we want more bank competition, we need to make it easier to open a new bank. I’ve blogged often about how difficult that is and it’s getting no easier. If anything it’s tougher.
Finally, there is a big dichotomy between big banks and small banks. Most consumers don’t trust small banks, even though they give better service. This is why credit unions and building societies are generally small, apart for the one exception of the Nationwide. So small banks should focus upon community, including low income communities, and service. Big banks are trusted that they won’t fail and provide the hygiene services of transaction banking. That’s all most people want, safe and secure transactions. Simple.
Meanwhile, I did learn two other things at the event.
One from Metro Bank, our favourite new bank, is that 68% of Londoners and 32% of Brits have heard of Metro Bank ... not bad for a bank with four branches. Oh, and don’t be too smug about their size, they just got £52 million in new funding secured yesterday to expand to 18 branches by 2012, six more than the original target.
And Vernon Hill, founder of Metro Bank, was reported as saying to the Treasury Select Committee yesterday that the standard of retail banking in the UK is "shocking" and run by a concentrated group that apparently believes "you have to deliver bad service to make money".
He’s out to change that. Bearing in mind he achieved that objective in one of the hardest markets to crack – the USA – I think he’ll achieve something here.
Second, there is a new bank in Britain that I had not heard of before: the Secure Trust Bank.
Secure Trust Bank offers a current account that requires no credit checks, KYC or AML for the account opening.
It’s a prepaid bank account.
“The Prepaid Basic Bank Account comes with a prepaid card. Simply retain sufficient funds in your account to cover your regular commitments and outgoings. The rest can be transferred onto your Prepaid MasterCard for you to use as you would a debit card, at over 28 million outlets, any cash machine, retail outlets and for shopping online or over the phone. You can vary the amount that you transfer to your card at any time – online or by our automated telephone service, 24 hours a day, 7 days a week.”
Perfect for the underbanked, unbanked ... and those who want to anonymously gamble, buy porn and do other crap over the internet.
So there’s some competition in UK banking out there after all!
On Tuesday last week the House of Commons Treasury Committee took evidence from
It makes for interesting viewing, although long - you can watch the whole Committee meeting by clicking here.
Andrew Tyrie, the Head of the Committee, will be our keynote address at the Financial Services Club tomorrow night, our final meeting of 2010.
And, if you don’t have a few hours free to watch the Committee meeting, here’s a summary of what transpired from the Scotland Herald:
Lloyds Banking Group chief executive Eric Daniels warned that breaking up banks would not improve competition as he highlighted the importance of the Bank of Scotland brand north of the Border.
Meanwhile, his retail banking chief Helen Weir was lambasted by MPs for admitting she does not know how much her current account costs her, although she said the typical customer pays the equivalent of a cup of coffee a week in charges and foregone interest.
Mr Daniels told the Treasury committee that Lloyds, which is 41%-owned by the taxpayer, had not offered to sell Bank of Scotland when it negotiated with European competition officials last year.
He said: “What we presented to them were a variety of alternatives.”
Asked if selling Bank of Scotland, which it acquired with the rescue takeover of HBOS, was one of them, he said: “I do not believe that this was an alternative considered.”
He added: “The Bank of Scotland is a very powerful brand in Scotland. It is a 300-year-old name and identification with it is very strong.”
He noted it had “more resonance” with customers than Lloyds TSB Scotland, which it has agreed to sell.
The Independent Commission on Banking is looking at competition and could recommend the break-up of Lloyds, which has roughly 30% of UK mortgages and current accounts.
The market north of the Border is particularly dominated by Lloyds and Royal Bank of Scotland.
Mr Daniels said: “This is an immensely competitive market. I am not sure dividing banks up further will give a more competitive outcome.”
Stephen Hester, chief executive of Royal Bank of Scotland, said: “We believe we can compete successfully in the market, as we see it, for all its warts.”
Asked if the combined Lloyds TSB-HBOS is a “wart”, Mr Hester said: “I do not think it is right to be drawn on that.”
He, too, played down the importance of new entrants.
“There is not a queue of people trying to enter the UK market.”
He added: “I do not see evidence that a high street you can walk down with 10 banks has particularly greater competition than one with five.”
He cited the example of the supermarket sector dominated by four players.
Helen Weir, Lloyds’s group executive director of retail, said the typical current account in credit is losing £35 a year in “interest foregone” – the difference between what the customer received and Bank of England base rates. Lloyds also charges interest and fees on overdrafts.
She said that, in all, a customer pays the equivalent of a cup of coffee a week for an account, around £100 a year.
Ms Weir said banks face costs including branch networks and cash machines.
She said: “I think most customers would have a good idea what they pay for their current account.”
But she admitted she did not know what she paid for hers.
Treasury committee chairman Andrew Tyrie said: “The idea that customers have a pretty good idea how much they are paying for their current accounts will be met with a loss of credulity among many of them since the group executive director herself did not know how much she paid.”
Benny Higgins, chief executive of Tesco Bank, which plans to launch mortgages and current accounts, described free banking as a “myth”. He criticised the difficulty of switching between banks and opaque charging.
“It is an unequivocal conclusion that the market is not competitive,” he said.
Mr Higgins accused big banks of sharing customer information it denies to others. This was refuted by Lloyds and RBS.
Mr Hester said he expected the Government’s 83% stake in RBS to be sold in tranches.
He said: “I think it would be a symbol of Britain’s recovery. It would be a symbol of Royal Bank of Scotland’s recovery.”
He said he had not requested a copy of last week’s report by the Financial Services Authority into RBS’s near-collapse in 2008.
Overall, the evidence was very interesting in the light of the review of competition and choice in the banking sector.
Set against Sir Don Cruikshank's evidence the previous week it focuses nicely on the key areas of both sides of the argument and asks questions about why there has been no significant change to competition in the sector in the ten years since the Cruikshank report.
I’m regularly asked the question as to when the government will get rid of their stake in Lloyds and RBS, return them to the private sector, give a profit to the taxpayer and butt out of banking.
I always give the same answer: “when the government needs votes”.
The reason for this is the government will need votes to get back into office in 2014 or thereabouts, and what better way to do that than to raise their hands and say: “Behold! We giveth the banks that Labour broke back into the hands of Enterprise. And Behold! We also maketh much wonga in doing this deed!”
When the government bailed out RBS and took over 84% of the bank, they paid 49.9 pence per share. For Lloyds, the taxpayer owns 41% of the bank at an average of 63.2 pence per share.
At today’s share prices of 41.8 for RBS (it did skate over 50 pence per share earlier this year) and 67.5 for Lloyds, the government could effectively be making several billions in profit at some point in the near future.
This will be great news for the government and the taxpayer, and the banks keep telling the government this news, pleading that they divest their ownership as soon as possible.
This is the theme that occurred again today as bank chiefs appear before the Treasury Select Committee – the Chair of which, Andrew Tyrie, will be speaking at our special end of year dinner at the Financial Services Club next week.
They want the government to butt out, sell their stock and take their profit.
Of course they do, as this will mean they are no longer under the influence of the UK Financial Investments (UKFI) Ltd, who has the bank’s boards by the short and curlews. In particular, Stephen Hester at the behest of the Chancellor and other Treasury officials is regularly hauled over the coals for due diligence in lending practices, fees, charges and other matters that, by rights, should be under the banks control.
It’s under the governments.
And whatever UKFI says about being independent and neutral, they do explicitly say: “ UKFI is a Companies Act Company (Company no: 6720891), with HM Treasury as its sole shareholder. The company’s activities are governed by its Board, which is accountable to the Chancellor of the Exchequer and – through the Chancellor – to Parliament.”
Between the Treasury Select Committee, UKFI, the Banking Commission, the Bank of England, the FSA, the media and the stakeholders, I actually feel quite sorry for these bank leaders.
Sacrificing bonuses and continually being raked over the coals, it cannot be a great life.
And that’s why the banks are desperate to get the government to butt out.
Ah well, a word of advice to Mr. Hester and Mr. Daniels successor, António Horta-Osório ...
When the government sells your banks back into the private sector, take their profits in 2014 and get re-elected into office once more, stand by for your Knighthoods.
I’m sure even Sir Francis Drake would have been impressed that the government at least chose a Portuguese leader to Knight for services to their bank.
I got a note today regarding the fact that the Head of Barclays Global Retail Division, Antony Jenkins, appeared on BBC Radio’s Today program this morning saying that the level of consumer complaints to banks in general, and to Barclays specifically, is “not acceptable”. The Financial Ombudsman Service said it received and upheld more complaints about Barclays than about any other bank last year, and Mr. Jenkins said Barclays are committed to reducing the numbers of complaints.
On the same day Eric Daniels, Chief Executive of Lloyds Banking Group, is quoted in today's Daily Wail as saying that the bank is “punching below its weight given our market shares” with regard to complaints.
As a result, it prompted me to revisit the FSA’s and the Financial Ombudsman’s figures. In so doing, I stumbled across some interesting anomalies.
First, the FSA’s complaints report. Here’s the key highlights for the first half of 2010 (H1-2010):
First, the figures for 2009 were excessive because banks had been waiting to process many overcharging complaints whilst a court decision was being taken. This decision was taken in November 2009, and resulted in a mass backlog of complaints being registered and processed. As a result of that anomaly, complaints about banking in H1-2010 decreased by 50% to 999,196; complaints about current accounts decreased by 63% to 599,249; and complaints about ‘terms and disputed sums or charges’ decreased by 63% to 575,348.
The number of complaints about payment protection insurance increased by 53% to 265,949.
The number of complaints relating to ‘advising selling and arranging’ increased by 22% to 364,891. 281,994 of these complaints were about general insurance and pure protection, and many of these were related to payment protection insurance.
The number of complaints relating to ‘general administration /customer service’ was the lowest since the second half of 2006 at 596,606.
The number of closed complaints increased by 76% to 2,819,678, as many of the bank charge complaints were reported as closed. The number of closed banking complaints increased by 126% to 2,166,304, with 84% closed within 8 weeks.
Total redress paid in 2010 H1 increased by 43% to £406 million. The largest amount of redress by product was for general insurance and pure protection which increased by 92% to £276 million. This may reflect the large number of complaints relating to payment protection insurance.
As can be seen, many of the complaints concern payment protection insurance. Eric Daniels says that he is not surprised they have risen astronomically because “more column inches have been given to [the issue] than the impending Royal Wedding”.
I can see where he’s coming from on this, as I was recently talking to one of Lloyds retail heads, who told me that the astronomical rise in PPI (Payments Protection Insurance) was a real processing headache, especially as “one in four PPI complaints are from people who don’t even have an account with the bank”!
Now then, going back to that comment about Lloyds “punching below its weight”. Among the major banks, the list of banking complaints noted by the FSA has Lloyds at the top of the list, which received 288,717 complaints in the first six months of 2010, closely followed by Barclays with 259,266 and Santander with 244,978.
So if Lloyds has the most complaints, how can it be “punching below its weight”. Oh yes, there was the other part of that comment: “given our market shares”.
There were 288,717 complaints against Lloyds Banking Group, more than any other institution, but this represents less than 1% - about 0.96% - of its 30 million customer base.
Compare this with Barclays who had 250,667 complaints, representing approximately 1.19% of its 21 million UK customers.
Second worst was government-backed Royal Bank of Scotland, as roughly 1.07% (166,172) of its 15.5 million UK customers made a complaint, although these figures do include its insurance subsidiaries, Churchill and Direct Line.
Santander was next up with approximately 1.02% (256,823) of its 25 million UK customers registering an official protest in that period, whilst HSBC performed best of the major banks with just 0.5% (81,271) of its 16 million customers making a complaint.
Interestingly, the proportion of complaints dealt with within eight weeks are also an indicator as to how well these banks are working, with Lloyds securing a completion rate of 97% for customers within eight weeks; Barclays dealt with 91% of cases within the period; whilst Santander closed only 46% of complaints within eight weeks.
This looks bad for Santander, but you then need to look at the Financial Ombudsman’s figures too.
The Ombudsman upheld a whopping 61% of complaints about Barclays, which was the worst performer. 50% of complaints were upheld against Royal Bank of Scotland and 45% against Lloyds TSB, compared to an industry average of 44%. It only supported a fifth of consumers against Santander, the best performing bank in this category despite the high numbers of complaints it attracts and the slow processing of them.
With regard to total complaints, and bearing in mind that Barclays had the most upheld, these figures are also of note:
Firm Number of new banking complaints recorded
Barclays Bank 4,797
Lloyds TSB Bank 4,051
Bank of Scotland 3,876
HSBC Bank 1,718
NatWest Bank 1,617
MBNA Bank 1,184
Capital One Bank 819
Clydesdale FS 701
Royal Bank of Scotland 618
Nationwide BS 594
Alliance & Leicester 430
Clydesdale Bank 419
Only 5% of customers rejected by their bank take their gripe to the Ombudsman, despite a better than average chance of success.
What that means, is that Barclays with 21 million accountholders had around 100,000 serious customer disputes, of which almost 5,000 went to the Ombudsman and 3,000 were upheld. Lloyds with 30 million customers had more like 80,000 disputes, with 4,000 going to the Ombudsman and 1,800 upheld.
So Barclays have double the number of disputes passed in the customer's favour over Lloyds with a third less customer base.
That's quite telling.
A good example of the sort of bad behaviour can be found in this blog: Barclays: not a great home for my savings. Their video is worth a viewing if you want to know the alleged misdemeanour:
In a world of social media, Jane's story (for it is hers) spreads fast, so it's not just the Ombudsman and the FSA that banks should fear these days ... but also the customer.
All in all, this little bit of analysis provided an interesting landscape of issues and performance by our banks in dealing with them.
Finally, given the headline: “Lloyds gets the most complaints” the above shows that, digging beneath the surface, this is entirely misleading.
Mr. Jenkins of Barclays gets it more right when he says that the level of consumer complaints to banks in general, and to Barclays specifically, is “not acceptable”.
So this morning RBS announce losses of £1.4 billion this morning, with various headlines reporting the news:
Admittedly RBS has taken a battering, but their management through the post-crisis hurricane has been pretty good so far, as evidenced by the interview with Stephen Hester the other day, and by his comment in the interim statement: “Our third-quarter results demonstrate that we continue to make good progress in our recovery. We are delivering what we set out to achieve.”
You wouldn’t believe it from that BBC headline above, but here are the real highlights:
Bottom-line: impairment charges tumbled a better-than-expected 40% to £1.95 billion compared with the same three months last year, pushing net losses down from £1.8 billion to £1.15 billion.
HSBC have also just announced a healthy profit forecast, without detailing the numbers, and Barclays report next Tuesday.
But, in looking at these announcements, I started writing down the challenges these banks face and was surprised to find how long the list became.
Here are the headlines:
Changes of Leadership
The banks have all just changed leaders with John Varley (Barclays), Michael Geoghegan (HSBC) and Eric Daniels (Lloyds) all stepping down to be replaced by internal candidates Bob Diamond (Barclays) and Stuart Gulliver (HSBC), shock move to Santander’s UK CEO Antonio Horta-Osorio for Lloyds.
Any organisation with a new leader has challenges.
In Barclays case, tic will be how to get Mr. Diamond, who is an investment banker through and through, to deal with the retail and commercial banking areas and avoid the bank just becoming another Goldman Sachs. Mind you, that’s no bad thing is it?
In HSBC’s case, it’s all about continuity and management of the great ship as one bank globally. Or rather, it’s how to continue Asian growth whilst dealing with the mess of regulations that will impact its global business portfolio.
For Lloyds, it’s all about keeping a tight ship and making sure the bank steers towards profitable growth in the UK markets through the new streamlined operations as HBOS and Lloyds TSB merge. That merger is already delivering £1.5 billion of savings per year and £2 billion next year. In selecting the charismatic Portuguese leader of Santander UK, the bank obviously sees this as being priority and that this is the man to do it. Nevertheless, it does raise questions in my mind, as Mr. Horta-Osorio strikes me more of a cost efficiency numbers man than a customer-centric banker.
Lending comes up all the time in UK bank dialogue, as evidenced last week:
Martin Woolf: “There is this big hullabaloo about lending. What is your stance on lending in Britain?”
Stephen Hester: “There is excessive critique about unsafe lending. That is what caused this crisis and yet the political criticism could be encouraging us to do that again. We take the view that we are guided by our goals, which is to support customers to be safe and reward our shareholders appropriately. Therefore, if part of what our customers need is lending and if our customers can pay us back, why wouldn’t we be lending to them?”
Well, the lending area is now driven by targets, with Lloyds and RBS on track to meet targets set by the UK Government for small business lending this year. However, there is still dwindling availability of mortgages and bad debts are still a big issue, so this little nugget won’t go away.
This is why the British Banker’s Association (BBA) set up a taskforce in August that reported to the UK Chancellor George Osborne with an action plan to create new credit capabilities through a 17-step action plan. The key point picked up by the press is the £1.5 billion stake in small business equity.
Neverthless, lending, bad debts and impairments is still an issue and hot topic, and will remain so for the foreseeable.
The Banking Commission
Talking of Martin Woolf Martin Wolf (Associate Editor and Chief Economics Commentator at the Financial Times, London) above, he’s part of the panel of the Banking Commission alongside:
What is the Commission?
It’s an independent Commission on banking, created and launched in June 2010 with the mission to consider structural and non-structural reforms to the UK banking sector to promote financial stability and competition, and to make recommendations to the Government by the end of September 2011 .
This will be through a series of hearings that start in December in Leeds, Cardiff, Edinburgh and London, with the bank chiefs called into account to give evidence.
Like a Treasury Select Committee, the Banking Commission will focus upon how to recreate UK banking through consultation and then recommendations for reform.
Talking of regulations and reform, there’s a huge amount of this going on from the Basel III rules to OTC Derivatives, along with all the existing issues of previous regulations on liquidity and markets, payments, clearing and settlement and more.
In fact, there’s a whole mess of regulation, with different rules in different regions and different perspectives from different individuals in each regulatory and influencing authority. If I was a banker, I would probably find that recruitment to regulatory compliance functions is excessive whilst layoffs everywhere else in the bank are the same.
In particular, regulatory reform is potentially happening too fast and too uncoordinated. As Karen Fawcett, Senior Managing Director and Group Head of Transaction Banking at Standard Chartered Bank said at this year’s SIBOS: “If the regulations are implemented as they are currently written, we could be seeing a 2% fall in global trade and a 0.5% fall in global GDP.”
Or, as another session asked: “Is Basel Faulty?”
Or, as we debated in March this year: “We think Basel's liquidity standards are rubbish”.
Take Basel and substitute with any other regulatory title and you get the idea: the banks cheese is moving and no-one, including the regulators, seem to know where it’s moving to.
Add in a mess of other stuff such as:
And if I were Mr. Diamond, Mr. Gulliver, Sr. Horta-Osorio or Mr. Hester, then I would be pretty pleased to have turned in any profit or value at all so far this year.
Maybe it’s time to stop the banker bashing and start the banker reformation?
OK, so it's not scientific, but I've been looking at the UK's banks from four dimensions this week:
To the best of my databank's knowledge, the attributes and reviews are pretty accurate and have turned up some surprising results. For example, who would have thought that the UK's most stable bank would be the Royal Bank of Scotland? Mind you, I suppose it is government owned and therefore it should be pretty stable.
So here's the final result:
Yep, HSBC wins overall for all but one aspect: it's Tier I Capital Ratio.
Barclays do well generally, but their customer service needs focus.
RBS and Lloyds ... well, it's nice to know you can only get better.
Santander, Co-operative, Nationwide ... mixed results, and they're not included here as they don't register on all dimensions ... but at least the analysis given tells me that they're all doing some things right.
Mind you, I actually started this analysis because of Santander doing some things wrong, with their Partenon project stumbling and rubbish results in all of the customer satisfaction surveys.
So how come their pre-tax profit rose 10% and sales grew 6% in the first half of 2010?
Because they're the only bank that's lending ...
Santander UK claimed that it increased lending to small and medium-sized businesses by 20 per cent and wrote one in five mortgages to UK households, based on its gross lending market share of 19 per cent. Gross mortgage lending was £12.3bn in the first six months of this year, which is ahead of last year’s first half results of 14 per cent.Source: FT Advisor