The Financial Services Club's Blog

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

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

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

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

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

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

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

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

Back in 1994, Japan ruled the world.

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

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

Not the case.

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

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

Bankers bonuses in graphics

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

 

The land of a thousand voices

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

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

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

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

Trouble is, this doesn’t cut the mustard.

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

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

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

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

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

Nice.

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

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

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

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

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

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

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

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

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

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

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

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

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

No.

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

No.

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

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

Take the example I’ve just given.

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

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

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

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

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

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

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

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

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

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

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

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

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

Banks aren’t charities, so why do we treat them that way?

Banks aren’t charities and yet the non-stop bleating about bonuses and interest rates would make you think they should be run as though they were not-for-profits.

But banks aren't not-for-profit; they are proprietary firms with stock listings. They are there to make money, not to exist for the public good.

So what’s gone wrong?

Unfortunately during the past two years, the line between public and private has blurred, as evidenced by the Royal Bank of Scotland and Northern Rock, or by Citi and Bank of America in the USA, or HVB and Commerzbank in Germany, or UBS in Switzerland or ...

The fact that these banks were bailed out by their respective governments, albeit temporarily in most instances, has blurred the media and public’s view of what they are there for.

The media and general masses now think they own the banks or, at least, have some skin in their game. And sure enough, in the case of RBS and Lloyds, the UK taxpayer does have some skin in the game: 84% and 43% respectively.

But that doesn’t mean the taxpayer runs the bank or that they exist for the public good.

In the case of RBS and Lloyds, they actually now exist in a shadowland where they are competing with openly aggressive trading firms like Goldman Sachs and JPMorgan, whilst having to conform with the requirements of the Treasury and UKFI.

This causes this schizophrenia between being openly competitive versus being humbly contrite.

What a pain.

But look at the bottom-line: these banks are still private firms with stock listings who have to serve their shareholder first.

That’s why they are paying bonuses, restricting lending, avoiding risk and being competitive.

Or that’s their thinking.

This is why we find it so hard to determine the right approach to bonuses and remuneration.

But take this a step further and we now have the journalistic and taxpaying community believing that they should somehow determine the interest rate setting policy and fees of the bank.

For example, over the weekend, the Beeb got itself into a tiz over credit card interest rates. The question posed is why, when the Bank of England’s interest rates are at their lowest levels ever, are banks charging the highest rates ever on credit card balances?

The answer is simple. The credit card portfolio runs as its own division with its own P&L. Today, more folks are defaulting than ever before. As the risks are greater and bad debts increasing, the interest rate has to rise accordingly.

The media and public then say: but you’re paying out all these hefty bonuses, what about us? Decrease the bonuses so that you can reduce our credit interest rates.

C’mon now and be serious.

The investment bank doesn’t subsidise the card portfolio. They are separately run businesses with their own P&L and both are tasked with making a profit, so both run their book as competitively and profitably as possible.

That’s why Barclays announced an increase in overdraft fees on deposit accounts just two days after saying that BarCap’s bankers would get an average bonus and pay package of just under £200,000 each for the 23,000 staff in that division.

You see the latter achieved their annual objectives and targets, so that’s why they deserve it.

And all of this is in a competitive battlefield where anyone can walk – both staff and customers.

But it ain’t that easy.

First, Barclays are justified in their actions because they never dipped into the taxpayer’s pocket, unlike RBS and Lloyds. Therefore, are RBS and Lloyds justified in providing bonus packages in the same way as Barclays? If they are privately held, shareholder-owned competitive banks, yes; if they are semi-nationalised, taxpayer-funded state-run banks ...

In addition, the divisional components of the bank may be independently structured by their P&L but that argument doesn’t hold water when the bank would have gone under in the case of RBS, Citi and others, thanks to the failings of that very part of the bank that is now sharing the spoils amongst their staff at the customer’s and taxpayer’s expense.

It is this blurring of the lines between a nationalised business that should operate in the public’s interest versus the privatised industry that operates in the shareholders’ interest that is causing all of the media and general debate today, whether it is about bonuses, remuneration, profits, fees, interest rates or any other aspect of banking.

This half-hearted, schizophrenic shadow of an industry that doesn’t know whether it’s coming or going, and has no idea how to regulate itself or be regulated, needs a strong hand to steer it to an objective and vision for future operation.

That vision appears to be one of an independent industry, run under free market principles with shareholder focus as its central tenet.

If you don’t like it ... lump it.

Halifax's marketing is the worst I've ever seen ...

Every time the new Halifax ad comes on the box, I cringe ...

Now I’ve blogged about their awful advertising before and how insensitive it seems post-crisis, but this one really gets me down.

Not only is it cheesy, poorly executed and raw, but it actually makes most of the folks I talk to feel sick to see a bank that has cost billions in bailouts advertising as though nothing has changed.

And I’m not alone as the Telegraph decided to run a page last week asking what readers thought about a bank that offered a reward of £5 as long as you depsoti a minium £1,000 per motnth.

This advertising seems a bit rich, the Telegraph claims, when this particular bank has cost each and every family in Britain £5,500 to bailout in the last two years.

Steve Griffiths, director of brand and customer marketing for Halifax, says that their new advertising campaign focuses on "the core message that Halifax rewards its customers for their business and shows that our colleagues are enthusiastic, friendly and approachable".

The Telegraph’s readers say:

“Never mind the advert, I want my £5,500 back. I need it more than they do.”
Polly

“Who ever authorised this at Halifax needs stringing up for crimes against society!”
Paul

“Look closely and it really does show them up as a bank that cant be trusted.”
Simon Hawking

“Rather than coming across as "friendly and approachable" they come across as a load of immature bumbling morons.”
Dave

"If they changed the tune to 'sorry seems to be the hardest word' then maybe, just maybe, there might be some mileage in this. Talk about misreading the mood of the country."
Jeremy

There's a few amusements in there too, such as (excuse grammar):

"With lyrics like 'you're indestructible' (HBOS was considered 'too big to fail') and 'you've got the power to return' (thanks to a government bail-out), was the advertising agency having a sneaky dig at its clients by any chance?"
Ian

“At least it answers one question - what banker do to deserve such large bonuses. They have to work with the inane idiots that feature in the advert.”
Mike

“Stop knocking these ads. It gives me valuable exercise reaching for the mute button. Let's have more ads like it and I could achieve fitness and a Zen like calm during commercial breaks.”
Tim

Most worryingly for Steve Griffiths, director of brand and customer marketing for Halifax, should be the comments that read:

“I bank with the Halifax and this advert makes me want to leave them. It is that annoying!”
Phil

“Absolutely atrocious! Maked me want to change my bank!”
Jonny

“I am embarrassingly a Halifax customer, but not for long, I couldn't handle people knowing I bank with such morons, & that's not counting the £39, they charge you for an email for a £2.50 failed payment.”
Caz

“What the advert doesn't mention is the £12.50 per month which they charge you just for having the account, which of course does include the overdraft charges of £1 per day, the £1.50 per month 'debit card fee', and anything else they can think of to sting you with.”
Peter

“If you already bank with Halifax, and don't have a reward account, open one and just transfer £1,000 straight in and back out each month to get your fiver, you don't even have to do it in one lump sum, just £200 backwards and forwards 5 times, still counts, it's easy if you bank online.”
Ian

Message to Halifax: start advertising with honesty and sensitivity, and stop advertising as though the great British public are numbskulls believing that nothing has happened.

What the Halifax should have done ...

Thinking about the Halifax’s ads a bit more, some may say: “they are so bad, they’re good”, in a Shake & Vac sort of way (one of Britain’s most memorable and iconic ads – see end of blog entry if you want to see it).

I disagree.

The Halifax ads are just plain bad and have been well past their sell-by date for a long time.

For example, Delaney Lund Knox Warren & Partners (DLKW) won the Halifax account ten years ago and has run the "cast of characters" campaign – the one with staff members such as Howard – ever since.

Ten years is a long time for any campaign, particularly a cheesy one that has seen the bank bankrupted two years ago and now trading under new ownership, 43% of which is taxpayer funded.

So what should the bank have done?

How about a bit of honesty?

Run a campaign called: “we’re sorry”.

Get a serious but consumer liked presenter, such as Martin Lewis the consumer champion, to front it.

We may not like him, but the public do and they trust him.

So pay Martin a big chunk of money, or someone like him, and get him to be a talking head.

Then I would script him to say something like:

“The credit crisis has affected everyone, and the Halifax has been a part of that. They are sorry about this and, to recognise their gratitude to their customers they are rewarding every customer with a £5 payment for making a deposit of £1,000 each month. This is to reflect the fact that they have changed. They thank you for your continued support and guess what? I think they are OK, so give them a try.”

Something far more genuflective, like this, would be received so much better than using a ten year old, tired campaign that demonstrates that Steve Griffiths, director of brand and customer marketing for the Halifax, just isn’t doing his job properly imho.

Postnote #1: here’s that Shake & Vac ad. It ran from the late 1970s and is still remembered by most UK adults word-for-word. Enjoy!

Postnote #2: if you want to know the Top 10 most annoying UK finance ads ever according to the Times, here they are

Postnote #3: if you're interested in the ads we liked a lot, then here's our top five from 2009.

Scotland the Brand

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

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

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

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

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

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

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

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

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

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

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

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

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

RBS and HBOS happened: GET OVER IT!

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

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

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

Wow!

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

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

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

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

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

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

*

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Virgin gets easy pickings

It’s been a bit of a manic day today as we've spent most of the day talking about the news that the European Commission, after an eighteen month investigation, have given the all clear for Northern Rock to be split up into a ‘good bank’ and a ‘not-so-good bank’.  Not just this news, but also the news last week that they would shrink ING by half and the implications for other banks, such as Lloyds.

The Northern Rock news will call the 'good bank' Northern Rock plc, and will have all the branches, customer deposits, savings and low-risk mortgage book. The other half will be the Northern Rock Asset Management firm, and will keep the more risky mortgages worth about £40 billion.

The intention is to sell the good bank and for the government to keep the not so good bank until it can be made good, or the losses written off.

This gets interesting as it means that Britain’s first sign of big trouble – the Northern Rock –which went into terminal decline after a bank run back in late summer 2007 can finally pay back the £28 billion invested and give a return to the taxpayer.

The fact the European Commission saw no competitive issues is also interesting, as the government pledged £9 billion to help get Northern Rock lending this year – in fact, they told the management to stop repaying the £28 billion loan so fast – and this resulted in very attractive rates for new mortgages that, in the case of three of their products, are far better than anyone else’s. Is that competitive?

There’s also the question of who will buy them, and all money is on Virgin Money.

Virgin applied for a banking licence last week, and is clearly positioning to get more business. But without branches they may feel confined to just being a telephone bank.

They expressed interest in buying Northern Rock back when these troubles started, and still want a slice of an existing bank operation.

The real interest must be however in how much more of the UK High Street Virgin could get.

For example, the European Commission came out against ING last week and told them to split into two firms – a bank and an insurance group – and to get rid of ING Direct in America.

In other words, shrink the bank to about half its current size.

Similarly, back in May, they did the same with Commerzbank.

It would be unthinkable to imagine that when they look at the Lloyds TSB and HBOS merger that they wouldn’t do the same – in other words, shrink the bank – but the question is by how much.

Forty percent plus may seem harsh, but as the new Lloyds Banking Group has a third of all UK customer mortgages and deposit accounts, it must be major cutbacks.

Rumours are, for example, that Lloyds will need to sell off about 500 of their 3,000 branches.

Meanwhile, Santander has a lot of overlap on some high streets, thanks to having Alliance & Leicester, Bradford & Bingley and Abbey in their group. So they will probably want to sell some branches too.

As will Royal Bank of Scotland.

This means that Virgin could rapidly become a 1,000 plus branch-based bank in Britain by the end of the next couple of years, if they want to be.

So this is good for competition?

Or is it just creating a new bank brand for Virgin at low cost based upon easy pickings.

We shall see, but either way having a few new banks like Virgin, Tesco and Metro in the UK must be good for the consumer as we do need a bit more competition that the cartel that has been there historically.

So thank you Nellie Kroes and the European Commission.

What’s next?

  

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Sir Victor Blank interviewed about leaving Lloyds

The big coup in this month’s Management Today (MT) is an interview with the exiting Chairman of Lloyds Banking Group, Sir Victor Blank, who will be replaced by former Citibank Chairman, Sir Win Bischoff at the end of the year.

The editorial of MT starts by saying: “nobody, least of all Sir Victor Blank, wants to bring their career to an end labelled as a value-destroying loser with poor judgement whose final foray was a colossal balls-up ... Lloyds/HBOS’s problem is that when the mist clears and money starts being lent again, the new outfit will look like the whale in the pantry and this has not gone unnoticed in Brussels.”

But Sir Victor is unrepentant.

“What we did back in September last year was absolutely unquestionably the right thing to do, and it was, despite everything that has been said, properly reviewed.” (Note the use of ‘we’ as in Eric Daniels and Victor Blank, not Victor on his own.)

“It was properly diligenced, it was properly put together. I said to someone the other day it was done by the book, and I should bloody well know, because I wrote the book. You know, Weinberg and Blank on Takeovers and Mergers.

“It was so right, because we had spent a long time reviewing strategically the future of this group, which was prudently and conservatively managed, and seen by some people as a bit dull. But dull is not a bad thing. However, opportunities to grow abroad were limited – it’s very difficult to buy something at a high price overseas and then make money out of it. And we were restricted in what we could do in the UK because of the competition rules. We had, in my time, three strategy away-days which looked at what we most wanted to do – and that was to buy HBOS.”

Adding HBOS had first come up in 2000 when “the two chief executives exchanged letters – should we merge?”

Blank arrived later and revived the idea “because I knew Andy Hornby [the HBOS CEO]. But we all agreed the competitive environment wouldn’t allow it to happen. Then, in the turmoil of the summer of 2008, it seemed clear that something had to happen with HBOS, that this presented us with an opening.”

HBOS was in deep trouble.

“It’s share price was flagging, the markets were in turmoil and the interbank lending market was closing. So Eric Daniels picked up the phone to Andy Hornby and started the conversation. My role in it, as chairman of the board, was to make sure we did everything in the right way, and I also used an opportunity to talk with the Prime Minister, to raise with him how consolidation of the banks would benefit the Government.”

After the deal was done however, the economy fell off a cliff and HBOS “suffered terrible losses above what we were expecting. The share price fell – everybody’s share price fell. There was a lot of looking at the deal and questions being asked like: ‘Do these guys know what they are doing?’ ... but you don’t judge a massive strategic move six weeks after the deal has been completed. You have got to give the merger time.  But people didn’t want to give it time and there was a lot of focus on the personalities, on me and Eric, and that was clearly going to go on. It took the focus away from what we needed to do.  I was up for re-election at the AGM and I probably would have got re-elected, but decided the right course was to say that I would ensure there was an orderly process of succession.”

You’ll have to buy MT to read the rest, but it’s fascinating stuff including discussions about how to rebuild trust in banking and where the root causes lie. In particular a little pop at Lord Turner of the FSA:

“We’ve also got to make sure we don’t have headlines saying banks are ‘socially useless’, because they ain’t. We provide bank accounts to people who would not otherwise have one. We give to charity. WE provide a very important social function ... you have to find where the problem lies. My view is that it’s probably very concentrated in the investment banking area and we should examine what went on there.”

It’s quite a difference to his interview of a year ago.

First Direct leading the social finance mainstream

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

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

Finally, for the first time, one gets it.

First Direct.

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

 

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

and have 464 followers and 168 tweets as of today.

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

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

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

 

and it clearly highlights some of the positive views:

as well as the negative:

 

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

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

 

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

 

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

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

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

Lloyds TSB?

Nope.

No blog or anything.

NatWest?

Nope.

No podcasts or anything there on the home page.

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

 

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

Can't find the answer?  Contact us. 

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

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

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

*

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First Direct, Cahoot and Smile win again

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

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

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

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

Best current account

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

Worst current account

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

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

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

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

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

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

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

Whatever.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Yowzer! What does this mean for the big banks?

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

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

What did they do?

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

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

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

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

I told you he talked sense, didn’t I?

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UK banks give thanks for fair value accounting

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Unlike Lloyds.

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

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

Unlike the shock of HSBC.

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

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

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

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

UPDATE #1 8:45, 3rd August

Barclays make £2.98 billion profit

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

UPDATE #2 9:30, 3rd August

HSBC global profits slip to $5bn

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

Bad debts halve HSBC's profits

UPDATE #3 17:00, 4th August

Good analysis of UK bank capital ratio's:

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

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

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

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

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

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

(June 30, 2009)

Sources: Reuters; Company reports

UPDATE #4 22:30, 5th August

Lloyds rallies despite £4bn loss (BBC)

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

 

Source: BBC

UPDATE #6, 14:00 7th August

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

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

RBS Presentation of Results (100 page pdf)

UP*

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