The Financial Services Club's Blog

The High Priests of Banking

Talking about the St Paul’s protesters yesterday, you do wonder if they maybe have a good point or two to make.

Like their American counterparts, I’m sure they do but unfortunately it’s all a bit loose and airy-fairy, with a mixture of happy-clappy hippies, anarchistic anti-capitalists and an articulate few who can say it’s all about corporate greed.

Trouble is that’s too loose and unfocused to be an agenda for change that will work.

What’s needed is a singular objective such as: tie every corporate action to something that delivers benefits to society, or something like that.

A method whereby every transaction, every commercial movement, every electronic transmission submits a direct benefit to communities, citizens and taxpayers.

It doesn’t have to be in a tax form – it could be committing staff time to community projects – but it has to be allied, linked and integrated into commerce directly and with transparency.

Anyways, that’s not my agenda.

My agenda is banking and what needs to change there, and it was interesting talking with bankers yesterday about St Paul’s and other matters, in that the subject of religion came up several times.

Morals, ethics and religious focus is a mantra that’s been around a while now.

It first came up for me when I presented at Gresham College a couple of years ago.

At the time, there was this big debate about much of banking being ‘socially useless’, and how to turn this into something socially useful.

Various banks made commentary about this theme, and it was interesting that the two most outspoken leaders were both lay preachers: Sir Stephen Green, Chairman of HSBC at the time, and Ken Costa, former Chairman of Lazard International.

Back in 2009, both were talking about the industry losing its moral compass and how it was requisite to bring that bank.

The latter is now very active in making that happen by promoting an ethical code to the City, after leaving Lazards in March this year.

The issue for Costa is one of faith, as he is very active in the Church.

This is why he’s penned several articles about faith in commerce, with the latest in the weekend Telegraph saying that the City must rediscover its morality.

In the article, he states that although he believes that free market are the best way to create growth and jobs, boards and shareholders must have a better understanding of what constitutes real value.

“The present duty – on all boards to maximise shareholder value as the sole criteria for satisfying the return to shareholders – cannot continue.  I am aware that this is a big change that will need detailed discussion, but we need to start with big ideas.

“For some time and particularly during the exuberant irrationality of the last few decades, the market economy has shifted from its moral foundations with disastrous consequences. I cannot recall when public feeling worldwide has run so high, and even if only a minority takes its anger on to the streets, no one should imagine that the majority is indifferent to their cause.”

Mr. Costa should know what he’s talking about as he’s been appointed by St Paul’s to negotiate with the Occupy London Stock Exchange (#olse) group to see how to create an ethical corporate agenda for change.

He’s actually supported by a large group of people called: The City.

It may be surprising to some that the St Paul’s Institute ran research that was about to be published as the protesters moved in, which discovered most City workers believe inequality is a real issue.

The survey interviewed 515 financial professionals during August and September, and found that 75% thought that the wealth divide is too great and two-thirds believe that bankers are paid too much.

Interestingly, over half stated that deregulation of the financial markets had led to unethical behaviour (you can download the report if interested).

And maybe there’s the point.

Historically, banks have had a religious backbone.

For example, in my meeting yesterday were former directors of Barclays Bank and Barings Bank.  Both said they started each day with “Director’s Prayers”, with a salutation to God each morning as a group.

That backbone has been lost since the Big Bang, they claimed (October 1986).

One of them said that the City would fall apart if you practiced what God preaches.

When queried, he clarified to say that you buy when you think the seller is an idiot and you sell hoping that the buyer is one.  That’s how to make money in the City, and that’s where the ethos breaks down.

Does this mean that we all have to move to Sharia rule?

No.

But it does mean a change of thinking, a return to grass roots and a way of looking forward with more certainty.

This was the core of Bob Diamond’s speech to the BBC Today Lecture last week.

Bob Diamond is the CEO of Barclays Bank and, in a lengthy speech, he focused upon trying to answer the question as to how bankers can become “good citizens” again.

“First, we have to build a better understanding of how businesses and banks work together to generate economic growth; second, we have to accept responsibility for what has gone wrong; finally, most importantly, we have to use the lessons learned to become better and more effective citizens.”

He feels that banks have done a poor job of explaining how they can be ‘socially useful’ and makes clear that So banks make sure that a banks role is to make it easy for companies and governments to access capital by establishing a large consistent market of buyers and sellers.

“To do this they put capital at risk in order to discover what the market is willing to pay.  When banks do this well, interest rates are lower. If interest rates are lower, government and business borrowing costs less.  Without this, the result is clear - an increased cost of borrowing, higher taxes, lower public spending, slower economic growth and higher unemployment.  Providing this kind of support to clients requires banks to take risk but this is not speculative trading, so it bothers me when these activities are caricatured as gambling.

“These activities serve a social purpose and meet a real client need whether they are carried out on behalf of governments, pension funds businesses or individuals.”

 Critically, he makes the point that just as bankers caused the crisis they can also put it right.

“First, it's about how we behave, especially with our customers and clients; second, it's about what we do, and in particular how we help those customers and clients create jobs and economic growth; and third, it's about how we contribute to the communities we serve in many other ways.”

It’s a good speech – although some critiqued it as just being platitudes, motherhoods and apple pie – but as Bob says at the end:

“To the question ‘can banks be good citizens?’ the answer must be ‘yes’. But I'm mindful of what was said to me three years ago: ‘Bob, think about the fact that no-one will believe you.’  We're in the early stages of working to restore trust.  I'd like to be able to say we're achieving that, but I know that for you, seeing is believing.   You may not be able to see what's different today, but over time I very much hope you will see that and more.”

And note, he doesn’t use the words religion, ethics or morals once in this speech.

It’s not a question of religion.

It’s a question of culture.

“Culture is difficult to define, I think it's even more difficult to mandate - but for me the evidence of culture is how people behave when no-one is watching.  Our culture must be one where the interests of customers and clients are at the very heart of every decision we make; where we all act with trust and integrity.”

Damn right.

And I’ll be watching to see just who makes decisions with trust and integrity.

I guarantee that under these definitions, it isn’t Goldman Sachs.

Lloyd Blankfein on the one hand claims that their bank is doing "God's Work" whilst, on the other, when asked by Senator Carl Levin at an SEC hearing last year: “Do you think (investors) care that something is a piece of crap when you sell it to them?”, Lloyd calmly answers: “no”.

There’s something slightly hypocritical in that response isn’t there?

And whilst one maverick firm can break the oath of morality to do what’s right, then all others have to follow to compete is the usual mantra.

A moral compass, an ethical view and a religious purpose in banking – or, just being a good citizen – surely has to merit a bank doing what’s right for the customer.

Until some banks and bankers get that through their thick skulls and cultures, nothing has changed.

 

 

Bickers over Vickers: the right stuff?

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:

• Search for new approach to banking has begun - Financial Times
• The complexity of bank reform cannot be underestimated - The Telegraph
• Ring-fencing will dent growth, says forecaster - The Independent
• ICB to admit its reforms will cost banks billions - The Telegraph
• David Cameron in push to dilute ICB ring-fence reforms - The Telegraph
• Oxford Academic Becomes Key for U.K. Banks - Business Week
• 'Shadow banks' move in amid regulatory push  - Financial Times
• Grab some bargain banking shares while you can - The Telegraph
• The wrong reforms will break the banks - The Telegraph
• Banks 'at risk from devaluations' - BBC

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:

• Ring-fencing is confirmed, where banks separate domestic retail banking services from global wholesale/investment banking.  The commission is vague about whether banking to large companies should be in or outside the ring-fence but it suggests that between one-sixth and a third of the £6 trillion of bank assets should be inside the ring-fence.

• The ICB describes the ring-fence as "high" and said that the ring-fenced part of the bank should have its own board and be legally and operationally separate from the parent bank.

• Ring-fenced banks should have a capital cushion of up to 20% comprising equity of 10%, with an extra amount of other capital such as bonds. The largest ring-fenced banks should have at least 17% of equity and bonds, and a further loss-absorbing buffer of up to 3% if "the supervisor has concerns about their ability to be resolved without cost to the taxpayer".

• Capital could be moved from the ring-fenced bank to the investment bank, as long as the capital ratio of the ring-fenced bank did not fall below the 10% minimum.

And on creating new competition:

• The ICB has backtracked on an idea in its interim report that Lloyds Banking Group be required to sell off more than the 632 branches it currently has on the market to meet EU rules on state aid. It dilutes this, to say that it "recommends that the government seek agreement with Lloyds Banking Group to ensure that the divesture leads to the emergence of a strong challenger bank."

• It should be easier to switch bank accounts and the ICB recommends "the early introduction" of a system that makes it easier to move accounts and that is "free of risk and cost to customers". It rules out number portability — as is used with mobile phones — in favour of this switching service. The amount of interest that customers miss out on by having a current account — known as interest foregone — should also be published on annual statements.

• The industry should be referred for a competition investigation in 2015.

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:

• “that the divestiture of Lloyds’ assets and liabilities required for EU state aid approval will have a limited effect on competition unless it is substantially enhanced;

• “that it may be possible to introduce greatly improved means of switching at reasonable cost, and to improve transparency; and

• “that the new Financial Conduct Authority (FCA) should have a clear primary duty to promote effective competition”;

... 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.

Why?

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.”

 

 

 

Bank branches again ...

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.

 

The outlook for UK banking results this week

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:

• HSBC to cut 10,000 jobs despite $11bn profit – the Telegraph
• HSBC sells 195 New York branches for $1bn – the Telegraph
• HSBC expected to announce 10,000 jobs cut, disappointing results next week – the Australian
• HSBC set to 'confirm 10,000 job losses'– the Independent
• Market braces for banking results bonanza – the Independent
• Investment profits at UK's biggest banks 'fall by £2bn’ – the Telegraph
• City job cuts to cost the Government £1.3bn in lost tax revenue – the Telegraph
• UK banks’ jobs cull intensifies – the Financial Times
• Taxpayers Get 339.8 Million-Pound Profit From Nationalized Banks – Business Week
• Spanish bank fields Ronaldo as collateral – the Telegraph

 

 

 

Mobile contactless finally in my hand

Just got home from travels and found a leaflet on my doormat.

Usually such leaflets get thrown in the bin, but the strapline “start a whole new movement” in orange intrigued me.

I wonder what this is about I thought, as I’ve never had junkmail from what I assumed was Orange, the mobile phone operator.  Orange had never written to me before.

Turning to the back of the leaflet, the sight of a mobile telephone with “powered by Barclaycard” immediately caught my attention.

 

So I opened the leaflet and yay, this is the launch of Britain’s’ first mobile contactless programme in action (doubleclick image below to see large version).

The leaflet asks me to clink on an Orange webpage for more information ...

 

... and, on the webpage is a video explaining more:

The ordering is simple, and the phone is available for just £59.99 ($100) on a pay-as-you-go contract that’s quite attractive.

Maybe this really is a way for mobile carriers and banks to partner?

Either way, it shows Barclaycard on the leading edge once again.  After all, they appear to be the only card firm that regularly gets coverage on this blog as an innovator:

• Great advert for Barclaycard Contactless
• Barclaycard show some creativity
• Barclaycard contactless strikes again

All in all, the mobile payments revolution is under way and, in the UK, this one leads the way.

 

Let the bank tax and accounting wars begin

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.

Wonderful.

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.

No wonder they only managed to pay £113 million in Corporation Tax last year. That was on the back of pre-tax profits in of £11.6 billion.

Similar questions are being raised by analysts about Lloyds and HSBC.

For example, Lloyds Banking Group won’t pay any corporation tax until 2015 or after, even though it made over £2 billion in pre-tax profits.

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.

Basel III is a subject I generally try to avoid, but it has raised its ugly head this week with a report from the Matrix Group, published online by David McKibbin.

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 

 

Not just a banker, but a Diamond geezer

So we start the year as we mean to go on, with a bunch of MPs grilling a banker about bonuses, bailouts, lending and such like.

Banker bashing 2011: same sheet, different day.

This time it’s the turn of Bob Diamond, Chief Executive of Barclays Bank, to take the heat in front of the Treasury Select Committee (TSC).

And yes, he can take the heat, as he’s sitting on a personal fortune estimated at over £100 million with an £8 million bonus this year.

So go on, take a punch ...

... and the Committee did.

Following the meeting live on the Parliamentary website, supplemented by tweets from journalists Robert Peston and Ian Fraser, along with the blog of the Financial Times, made for a fun morning’s viewing.

The Committee is led by recent FSClub keynote Andrew Tyrie, who began by pressing for an answer to the question of whether shareholders get to see the bonus allocations before they are allocated.

“So the shareholders don’t know what you’ll be paying and the structure of the bonus scheme you will announce?” asked Tyrie, to which Diamond soft shoe shuffled.

An hour later and the subject bounded back again thanks to John Mann, Labour’s EveryMann, who started talking about how it would be easier to get a camel through the eye of a needle than a rich banker to get through the gates of heaven.

No wonder Bob responded: “You’re not a big fan of Barclays are you?” to which Mann said: “I’m a big fan of getting answers from you.”

He was then, in the words of Robert Peston, “filleted” by fellow TSC member George Mudie who pursued a line of questioning around why banks need to pay such massive bonuses to already well remunerated people when no other industry does this.

Mr. Diamond put it down to the nature of competition in banking ... a weak answer as it has so often been made clear that there is no competition in banking except amongst incumbents who are protected by licences.

Maybe a better answer, when challenged with whether he recognised the bonus issues as being “toxic in the real world”, was:

“We are sensitive, we are listening, and one of the reasons I was looking forward to today was to have an opportunity to put some balance and some understanding….we’ve done a very poor job over the years in explaining how the compensation process is integrated in the other aspects…how investment banks contribute to society…and I certainly pledge to do more in that regard.”

Or maybe not.

Nevertheless, a key point was made that if the UK clamped odwn hard on bonuses, then banks could easily relocated – having acquired Lehmans US operations, Barclays Capital could easily place staff into that office – and this would have the consequent effect of UK taxes being gifted to the US treasury.

As Mr. Diamond intimated - or was that threatened? - “Why would the United Kingdom not be proud to have one of the world’s best investment banks located here?”

Hmmmm ... another line of questioning I found intriguing came from Chuka Umunna, a smart young labout MP, who asked about Barclays tax avoidance practices.

He began by asking how many Barclays subsidiaries are incorporated in the Isle of Man?

Mr. Diamond didn’t know.

Mr. Umunna did. There are 30.

He then asked about Jersey.

“The number is 38,” says Chuka.

Cayman Islands – 181.

Chuka made it clear that “these are well known tax havens…a cursory reading of your group returns suggests you have over 300 companies operating in tax jurisdictions around the world.”

Mr. Diamond came back with: “I can assure you the bank is not evading taxes” and, as Mr. Umunna responded, he wasn’t asking about evasion which is illegal, he was asking about avoidance on a “grand scale” but (just) legal.

There were a number of other exchanges about bailouts, competition and the ethics of banking, with qauite a few intriguing and amusing comments:

Bob Diamond on the perceived invincibility of banks:

“Banks should be allowed to fail…It’s not okay for taxpayers to have to bail out banks.”

On steering Barclays through the storm:

"Let me be clear. Being Barclays or being HSBC in this country, where a number of banks did fail, there is little differentiation between banks that failed and those that didn't... We are very very proud that we managed through this period, profitably... and with the interests of our clients."

On reintroducing the principle of unlimited liability:

"Take Bob Diamond out it. You own two big banks. Would you be able to attract the calibre of Stephen Hester (RBS chief) and Antonio (Horta-Osorio - incoming Lloyds chief) with unlimited liability? I can't think of a single nationally directed institution that didn't end in tears, it is not the natural place to be."

The MPs on Bob Diamond:

"This is very nice, but it's not getting to the point. I've got tears pouring down my cheeks... I can hear the bloody bagpipes going." - George Mudie, Labour MP for Leeds East's response to Bob Diamonds violin-inspired speech about emigrating to Massachusetts from Scotland and Ireland; He told the Committee that as one of nine children, if he wanted a new bike, he knew he would have to save for it himself.

Andrew Tyrie, Conservative MP for Chichester and committee chairman, described Barclays shareholders as “interested, clever, uninformed” and "half-asleep", as Diamond told the committee that shareholders had never asked for information on bonuses.

"Over Christmas I read my seven year old The Emperor's New Clothes.... before taking apart his arguments on competition, on the threat that banks will leave... there is no evidence that banks will move. It's extremely disappointing, you are in denial about the taxpayers' support for you; denying a lack of competition in the industry; you're denying customer satisfaction; you're denying the lack of support for small businesses... the Emperor is wearing no clothes." - Andrea Leadsom, Conservative MP for South Northamptonshire.

"Why is it easier for a man to pass through the eye of a needle than a rich man to pass into the Kingdom of Heaven?" – John Mann, Labour MP for Bassetlaw, applies the well-known Biblical saying after Diamond’s vague replies on bonus, saying it’s a matter for the board.

Anyways, the one quote that remained with me throughout the whole grilling was this one from Bob Diamond: “There was a period of remorse and apology for banks, that period needs to be over.”

In other words, time to move on.

I think that was wishing on a star however.

Tough.

If you’re seriously interested, here are all the top entries on this story:

• Live Blog – Financial Times
• Live Blog – Daily Telegraph 
• Live Blog – Sky News
• Robert Peston’s Blog - Diamond: 'I am compelled to pay big bonuses'
• Ian Fraser’s Blog - Barclays boss Bob Diamond living in La-La Land

And a few news reports too:

• Barclays's Diamond Tells U.K. Lawmakers It's Time to End Bonus Apologies - Bloomberg
• Bob Diamond: No apologies. No restraint. No shame. - The Independent
• Big bonuses here to stay, warns Barclays chief Bob Diamond - The Independent
• Bob Diamond shines while in the spotlight - The Telegraph
• Bob Diamond's Treasury Select Committee grilling - in quotes - The Telegraph

 

 

Is there any competition in UK banking?

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:

• Martin Taylor, Independent Banking Commissioner and former Chief Executive of Barclays Bank;
• Martin Lewis, founder of Money Saving Expert;
• Mark Lyonette, CEO of the Association of British Credit Unions Ltd;
• Mike O’Connor, Chief Executive, Consumer Focus; and
• Danielle Walker-Palmour, Director of Friends Provident Foundation .

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.

• 34% were members of the public;
• 31% representatives of the industry;
• 27% representatives of consumers or charities; and
• 8% from the media.

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:

• 10% said very likely;
• 23% quite likely;
• 53% unlikely;
• 13% said they definitely would not change their account; and
• 1% did not have a bank account.
• The last one probably was a representative of the homeless charities.

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:

• 74% voted for an easy way to compare account fees and charges;
• 64% for a league table showing customer service levels and complaints;
• 42% for a public campaign to promote switching accounts by consumer organisations;
• 26% for an annual reminder of how easy it is to switch; and
• 20% for none of the above.

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?

• 66% voted for clear and easy charging structures;
• 60% for more financial education in schools;
• 58% for a facility to opt-out of unauthorised overdraft charges by not letting the customer go overdrawn;
• 52% for access to more affordable credit; and
• 38% for more outreach by banks to these people.

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.

• 30% said nothing
• 14% £1 per month
• 30% £5 per month
• 20% £10 per month
• 6% more than £10 per month

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.

What?

Yes!

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!

 

Barclays Capital is not just any old investment bank

I love the understatement in some magazines when they refer to companies.

For example, they might say: “according to a report today from Microsoft, a software company”; or, “in the news today the BBC, a broadcasting company” ... a bit like US reports saying: “news today from London, England” or “Paris, France”.

OK, OK, I know that it could be “Paris, Texas” but if it was “Paris, Texas” then say “Paris, Texas”, as the real Paris is always in France and always has been.

You got it, it’s Monday and I’m not in the best of moods ... too little Christmas shopping done and several hundred cards to write.

Sod it, I’ll just send an ecard instead.

Far easier and probably can just ‘bcc’ everyone with it in one click, done.

Yea.

So what’s pulled my chain this morning?

The Economist.

The Economist?

Yes, the Economist?

You see, they’ve published a fascinating item on bank lending, that shows bank lending to corporates and consumers has nose dived since the crisis hit, with the UK, USA and Australia particularly badly hit:

 

In fact, looking at Britain and Australia’s lines specifically, you see a massive boom in lending pre-crisis, with year-on-year rises exceeding 20%.

This is why the contraction in lending and credit is hitting so hard, as we’ve gone from over 20% rise year-on-year to a negative 5-10% year-on-year.

In other words, a net contraction of 25% to 30% over earlier times.

No wonder everyone’s hurting.

But why has this irritated me?

It should please me.

Well, no.

The Economist pulled my chain with their writing about this chart, saying: “According to Barclays Capital, an investment bank.”

Barclays Capital is not just any old investment bank.

It’s Bob Diamond’s bank.

And Bob Diamond is Bobtimistic to be Bob the Builder as Barclays’ Bobster in Chief.

You’re now probably thinking I’ve completely lost it but that’s OK, it’s Christmas.

I don’t mind losing it at this time of year.

Actually, the real reason for the Bobtimistic reference is that I had also just been reading Bloomberg Markets this week, with their front page story on the Bobster.

Here’s a flavour of that story:

As 1,100 managing directors from Barclays Capital descended on the Grosvenor House hotel near London’s Hyde Park in late September, they had more to celebrate than having successfully swallowed the North American unit of Lehman Brothers Holdings Inc. two years earlier.

Their guy, Bob Diamond, the Massachusetts-born founder of Barclays Capital, had just been handed the top job at parent Barclays Plc in a sign of how he had transformed the 320-year-old British institution in his 14 years as investment bank chief, Bloomberg Markets magazine reports in its January issue.

“Bobtimistic” is how Rich Ricci, Barclays Capital’s new co-chief executive officer, described Diamond’s eternally upbeat attitude to the assembled executives as he introduced a five- minute video send-off.

“I’d like to say that he’s too humble to recount what we are about to show in this video, but you’ll probably just have to hear it twice,” Ricci joked.

The tribute, heralded by blaring trumpets, featured a digital scrapbook titled “The Wonder Years,” with clips of Diamond hiking up his yellow suspenders in 1997 as he talked about making Barclays Capital a bond market leader; a mock image of him dressed like the children’s cartoon character Bob the Builder; his first pep talk to Lehman employees after acquiring the bankrupt broker-dealer in 2008; and photos of him with Rolling Stone Mick Jagger, soccer stars of London’s Chelsea Football Club and pro golfer Phil Mickelson.

Enough ... I’m now feeling really ill ...

 

Barclays: Banks Behaving Badly

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”!

Ludicrous.

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

Santander                               3,214

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

Egg                                          594

Citi                                          528

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”.

Agreed.

 

Stop banker bashing and start the banker reformation

So this morning RBS announce losses of £1.4 billion this morning, with various headlines reporting the news:

• RBS losses shrink on sharp fall in bad loans - The Telegraph
• RBS Narrows Third-Quarter Loss as Provisions Decline - Business Week
• The Royal Bank of Scotland sinks £1.4bn into the red – BBC

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:

• The Royal Bank of Scotland Group reports a third quarter operating profit of £726 million, excluding fair value of own debt (FVOD), up £476 million versus Q2 2010
• Including an £858 million FVOD charge, Q3 2010 operating loss was £132 million
• Attributable loss of £1,146 million for Q3 includes APS charge of £825 million
• Core RBS operating profit, excluding FVOD, up 10% on the second quarter, to £1,732 million
• Group impairments down 21% versus Q2 2010; Non-Core assets down £20 billion in Q3 2010;
• Core Tier 1 ratio 10.2%

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.

Like Lloyds’ comments and changes this week, this shows continued recovery in the UK bank sector which is on target for recovery by 2012, as previously blogged.

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

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:

• Sir John Vickers (formerly Chief Economist at the Bank of England; member of the Monetary Policy Committee; Director General/Chairman of the Office of Fair Trading; and President of the Royal Economic Society);
• Clare Spottiswoode (Chair of Gas Strategies and European Chair and NED of Energy Solutions);
• Martin Taylor (Chair of Syngenta AG and formerly Chief Executive of Barclays and an international adviser to Goldman Sachs from 1999 to 2005); and
• Bill Winters (Co-CEO of JPMorgan Investment Bank, 2003-2010)

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.

Regulation

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:

• investment banking markets being deflated and flat;
• a big issue for UK banks with £5 billion plus potentially to be paid out for the mis-selling of personal protection insurance (PPI);
• bonus rows; and
• the general outlook for the economy, which is still uncertain;

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?

 

Britain's Best Bank 2010: HSBC

OK, so it's not scientific, but I've been looking at the UK's banks from four dimensions this week:

• Customers
• Employees
• Investors
• Regulators

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

Britain's Best and Worst Banks for Regulators

This week is dedicated to assessing the UK's best and worst banks from four dimensions:

• Customers
• Employees
• Investors
• Regulators

Having looked at the banks from the customers’ perspective on Monday, employees on Tuesday and investors on Wednesday, today it’s the turn of the regulator.

Now the regulators have been in a frenzy of self-analysis and navel-gazing ever since this crisis began, trying to work out their role in the world and how to avoid another crisis.

They’ve not done badly ... after all, since Lehmans collapsed and we had that horrible week of banks announcing implosion in September 2008, there’s only been 264 bank failures in the USA to date (see end of blog entry). There’s been about the same number in Europe but, unlike the USA, we don’t create websites that broadcast every bank failure.

So there’s been around 500 bank failures since 2008.

How to avoid another one.

Easy.

The regulator says that they’ll use the Bank for International Settlements (BIS) Tier 1 Capital Ratio’s to avoid further bank failures and financial crisis.

So let’s look at the BIS Tier I Capital Ratio measures for a second.

Tier I Capital Ratio measures a bank’s balance sheet strength, and shows the ratio of a bank's equity capital and disclosed reserves as a percentage of its risk-weighted assets. The higher the ratio, the more capital it is holding to enable it to absorb losses.

Effectively it’s the amount of money the bank keeps in its vaults. A 10% Tier I Capital Ratio, for example, means that the bank is holding $1 for every $10 it has in customer deposits. If there’s a run on the bank, that’s what causes the problem, because the other $9 is out there working the markets and earning interest.

The reason why it’s referred to as Tier I Capital is because it is that liquid – it’s like cash in the bank – versus Tier II Capital which tends to be more illiquid, such as land owned and balance sheet movements from undisclosed reserves or provisions for future losses.

Now, the BIS under Basel II says that a bank must have at least 4% of its total exposures – risk-weighted assets – held in Tier I Capital, and 4% in Tier II, creating a total of a minimum 8% in reserve to cover any unexpected downturn and losses.

In other words, it’s basically a minimum 8% needed in capital to cover all of a bank’s risks.

This is what went wrong in the financial crisis, as the risks were much greater and faster to impact a bank’s balance sheet than expected. For example, Northern Rock had a 7.7% Tier 1 Capital Ratio in 2007 – that’s double the minimum amount required – and yet it failed in August of that year due to liquidity risks, and its’ 2008 Tier 1 Capital Ratio was declared at 2.9% as a result.

This is why the regulators are struggling, as a run on the bank can soon eat away at all of that liquid capital and leave the bank desolate.

But of course, a bank run rarely happens and so it’s OK to think that Tier I Capital doesn’t need to be overly onerous, but just about right.

But what is ‘just about right’?

According to the BIS review of regulations, about 6% for Tier I Capital, of which the core has been doubled from 2% to 4%. Oh yes, that’s another nuance, ‘core Tier I’ versus ‘Tier I’.

This is slightly more confusing, but there are actually two sorts of Tier I Capital Ratio’s – core Tier I and Tier I. The main difference is that banks don’t like to keep cash in the vaults, and so they’ve worked out ways to use exchange controls and other Special Purpose Vehicles (SPVs) – read ‘derivatives’ – to make sure cash can still be liquid, but working the markets to gain interest.

These are viewed as ‘innovative’ Tier I Capital measures as it's not really cash in the bank, and such instruments are limited to 15% of Tier I Capital.

So there you go. I know it’s confusing, but you basically have Core Tier I Capital – read this as cash in the bank; Tier 1 Capital – cash and liquid assets; and Tier II Capital – less liquid assets.

Finally, according to Reuters, banks will need a minimum of 4% Core Tier I, and overall “Tier 1 capital of 6 to 8 percent and 8 to 10 percent of combined core Tier 1 and the countercyclical buffer”. The countercyclical buffer is this idea that came from Spain where reserving in the good times will cover the bad. Therefore, a bank must keep an extra 2% of reserves during profitable years which they can dip into in unprofitable years.

OK.

So how do our banks shape up if we use these measures?

According to the above, as times are now profitable, the banks should have a minimum 10% Tier I Capital as they should be building that countercyclical buffer.

OK, here's a useful chart from the British Banker's Association (double click image to see larger version):

 

Source: BBA’s latest banking facts and figures 

Narrowing this down to the main headline news of Tier I Capital Ratios, here’s the information we really need to look at:

Hmmm ... HBOS had a higher Tier I Capital Ratio than Lloyds TSB in 2008; Alliance & Leicester and Bradford & Bingley were well above the BIS requirements; RBS is particularly well capitalised; and Northern Rock appeared to have no issue in 2007, as mentioned.

And yet, these are all the failed banks of Britain!

This Tier I Capital Ratio measure ain't that good is it?

And what does it tell us about the EU stress tests? Oh dear ...

FDIC list of US banking failures since Lehmans crashed (September 15th 2008):

1. August 13, 2010 Palos Bank and Trust Company
2. August 6, 2010 Ravenswood Bank
3. July 30, 2010 Bayside Savings Bank
4. July 30, 2010 Northwest Bank & Trust
5. July 30, 2010 LibertyBank
6. July 30, 2010 The Cowlitz Bank
7. July 30, 2010 Coastal Community Bank
8. July 23, 2010 Williamsburg First National Bank
9. July 23, 2010 Sterling Bank
10. July 23, 2010 Crescent Bank and Trust Company
11. July 23, 2010 Thunder Bank
12. July 23, 2010 SouthwestUSA Bank
13. July 23, 2010 Community Security Bank
14. July 23, 2010 Home Valley Bank
15. July 16, 2010 Metro Bank of Dade County
16. July 16, 2010 Woodlands Bank
17. July 16, 2010 First National Bank of the South
18. July 16, 2010 Olde Cypress Community Bank
19. July 16, 2010 Turnberry Bank
20. July 16, 2010 Mainstreet Savings Bank, FSB
21. July 9, 2010 Bay National Bank
22. July 9, 2010 Home National Bank
23. July 9, 2010 USA Bank
24. July 9, 2010 Ideal Federal Savings Bank
25. June 25, 2010 Peninsula Bank
26. June 25, 2010 High Desert State Bank
27. June 25, 2010 First National Bank
28. June 18, 2010 Nevada Security Bank
29. June 11, 2010 Washington First International Bank
30. June 4, 2010 Arcola Homestead Savings Bank
31. June 4, 2010 First National Bank
32. June 4, 2010 TierOne Bank
33. May 28, 2010 Granite Community Bank, NA
34. May 28, 2010 Bank of Florida - Southwest
35. May 28, 2010 Bank of Florida - Southeast
36. May 28, 2010 Bank of Florida - Tampa
37. May 28, 2010 Sun West Bank
38. May 21, 2010 Pinehurst Bank
39. May 14, 2010 New Liberty Bank
40. May 14, 2010 Midwest Bank and Trust Company
41. May 14, 2010 Satilla Community Bank
42. May 14, 2010 Southwest Community Bank
43. May 7, 2010 The Bank of Bonifay
44. May 7, 2010 Towne Bank of Arizona
45. May 7, 2010 Access Bank
46. May 7, 2010 1st Pacific Bank of California
47. April 30, 2010 Eurobank
48. April 30, 2010 Frontier Bank
49. April 30, 2010 BC National Banks
50. April 30, 2010 Champion Bank
51. April 30, 2010 CF Bancorp
52. April 30, 2010 Westernbank Puerto Rico
53. April 30, 2010 R-G Premier Bank of Puerto Rico
54. April 23, 2010 Broadway Bank
55. April 23, 2010 New Century Bank
56. April 23, 2010 Peotone Bank and Trust Company
57. April 23, 2010 Wheatland Bank
58. April 23, 2010 Lincoln Park Savings Bank
59. April 23, 2010 Citizens Bank and Trust Company of Chicago
60. April 23, 2010 Amcore Bank, National Association
61. April 16, 2010 AmericanFirst Bank
62. April 16, 2010 First Federal Bank of North Florida
63. April 16, 2010 Lakeside Community Bank
64. April 16, 2010 City Bank
65. April 16, 2010 Tamalpais Bank
66. April 16, 2010 Innovative Bank
67. April 16, 2010 Butler Bank
68. April 16, 2010 Riverside National Bank of Florida
69. April 9, 2010 Beach First National Bank
70. March 26, 2010 Desert Hills Bank
71. March 26, 2010 Unity National Bank
72. March 26, 2010 Key West Bank
73. March 26, 2010 McIntosh Commercial Bank
74. March 19, 2010 Appalachian Community Bank
75. March 19, 2010 Advanta Bank Corp.
76. March 19, 2010 Century Security Bank
77. March 19, 2010 American National Bank
78. March 19, 2010 State Bank of Aurora
79. March 19, 2010 First Lowndes Bank
80. March 19, 2010 Bank of Hiawassee
81. March 12, 2010 Old Southern Bank
82. March 12, 2010 The Park Avenue Bank
83. March 12, 2010 Statewide Bank
84. March 11, 2010 LibertyPointe Bank
85. March 5, 2010 Bank of Illinois
86. March 5, 2010 Sun American Bank
87. March 5, 2010 Centennial Bank
88. March 5, 2010 Waterfield Bank
89. February 26, 2010 Carson River Community Bank
90. February 26, 2010 Rainier Pacific Bank
91. February 19, 2010 La Jolla Bank, FSB
92. February 19, 2010 George Washington Savings Bank
93. February 19, 2010 The La Coste National Bank
94. February 19, 2010 Marco Community Bank
95. February 5, 2010 1st American State Bank of Minnesota
96. January 29, 2010 First National Bank of Georgia
97. January 29, 2010 Community Bank and Trust
98. January 29, 2010 Marshall Bank, N.A.
99. January 29, 2010 American Marine Bank
100. January 29, 2010 First Regional Bank
101. January 29, 2010 Florida Community Bank
102. January 22, 2010 Bank of Leeton
103. January 22, 2010 Premier American Bank
104. January 22, 2010 Charter Bank
105. January 22, 2010 Evergreen Bank
106. January 22, 2010 Columbia River Bank
107. January 15, 2010 Town Community Bank & Trust
108. January 15, 2010 St. Stephen State Bank
109. January 15, 2010 Barnes Banking Company
110. January 8, 2010 Horizon Bank
111. December 18, 2009 Independent Bankers' Bank
112. December 18, 2009 New South Federal Savings Bank
113. December 18, 2009 Citizens State Bank
114. December 18, 2009 Peoples First Community Bank
115. December 18, 2009 RockBridge Commercial Bank
116. December 18, 2009 First Federal Bank of California, F.S.B.
117. December 18, 2009 Imperial Capital Bank
118. December 11, 2009 Valley Capital Bank, N.A.
119. December 11, 2009 SolutionsBank
120. December 11, 2009 Republic Federal Bank, N.A.
121. December 4, 2009 Benchmark Bank
122. December 4, 2009 The Buckhead Community Bank
123. December 4, 2009 First Security National Bank
124. December 4, 2009 AmTrust Bank
125. December 4, 2009 The Tattnall Bank
126. December 4, 2009 Greater Atlantic Bank
127. November 20, 2009 Commerce Bank of Southwest Florida
128. November 13, 2009 Century Bank, F.S.B.
129. November 13, 2009 Orion Bank
130. November 13, 2009 Pacific Coast National Bank
131. November 6, 2009 Gateway Bank of St. Louis
132. November 6, 2009 United Commercial Bank
133. November 6, 2009 United Security Bank
134. November 6, 2009 Prosperan Bank
135. November 6, 2009 Home Federal Savings Bank
136. October 30, 2009 Park National Bank
137. October 30, 2009 California National Bank
138. October 30, 2009 Community Bank of Lemont
139. October 30, 2009 Bank USA, N.A.
140. October 30, 2009 San Diego National Bank
141. October 30, 2009 Pacific National Bank
142. October 30, 2009 Citizens National Bank
143. October 30, 2009 Madisonville State Bank
144. October 30, 2009 North Houston Bank
145. October 23, 2009 Partners Bank
146. October 23, 2009 First DuPage Bank
147. October 23, 2009 Riverview Community Bank
148. October 23, 2009 Bank of Elmwood
149. October 23, 2009 Flagship National Bank
150. October 23, 2009 Hillcrest Bank Florida
151. October 23, 2009 American United Bank
152. October 16, 2009 San Joaquin Bank
153. October 2, 2009 Jennings State Bank
154. October 2, 2009 Southern Colorado National Bank
155. October 2, 2009 Warren Bank
156. September 25, 2009 Georgian Bank
157. September 18, 2009 Irwin Union Bank, F.S.B.
158. September 18, 2009 Irwin Union Bank and Trust Company
159. September 11, 2009 Brickwell Community Bank
160. September 11, 2009 Corus Bank, N.A.
161. September 11, 2009 Venture Bank
162. September 4, 2009 First Bank of Kansas City
163. September 4, 2009 InBank
164. September 4, 2009 Platinum Community Bank
165. September 4, 2009 Vantus Bank
166. September 4, 2009 First State Bank
167. August 28, 2009 Bradford Bank
168. August 28, 2009 Mainstreet Bank
169. August 28, 2009 Affinity Bank
170. August 21, 2009 CapitalSouth Bank
171. August 21, 2009 First Coweta Bank
172. August 21, 2009 ebank
173. August 21, 2009 Guaranty Bank
174. August 14, 2009 Colonial Bank
175. August 14, 2009 Dwelling House Savings and Loan Association
176. August 14, 2009 Community Bank of Nevada
177. August 14, 2009 Community Bank of Arizona
178. August 14, 2009 Union Bank, National Association
179. August 7, 2009 Community National Bank of Sarasota County
180. August 7, 2009 Community First Bank
181. August 7, 2009 First State Bank
182. July 31, 2009 Peoples Community Bank
183. July 31, 2009 First State Bank of Altus
184. July 31, 2009 Mutual Bank
185. July 31, 2009 Integrity Bank
186. July 31, 2009 First BankAmericano
187. July 24, 2009 Security Bank of Jones County
188. July 24, 2009 Security Bank of Houston County
189. July 24, 2009 Security Bank of Bibb County
190. July 24, 2009 Security Bank of North Metro
191. July 24, 2009 Security Bank of North Fulton
192. July 24, 2009 Security Bank of Gwinnett County
193. July 24, 2009 Waterford Village Bank
194. July 17, 2009 BankFirst
195. July 17, 2009 Temecula Valley Bank
196. July 17, 2009 Vineyard Bank
197. July 17, 2009 First Piedmont Bank
198. July 10, 2009 Bank of Wyoming
199. July 2, 2009 Elizabeth State Bank
200. July 2, 2009 First State Bank of Winchester
201. July 2, 2009 John Warner Bank
202. July 2, 2009 Rock River Bank
203. July 2, 2009 First National Bank of Danville
204. July 2, 2009 Millennium State Bank of Texas
205. July 2, 2009 Founders Bank
206. June 26, 2009 Neighborhood Community Bank
207. June 26, 2009 Community Bank of West Georgia
208. June 26, 2009 MetroPacific Bank
209. June 26, 2009 Horizon Bank
210. June 26, 2009 Mirae Bank
211. June 19, 2009 Southern Community Bank
212. June 19, 2009 First National Bank of Anthony
213. June 19, 2009 Cooperative Bank
214. June 5, 2009 Bank of Lincolnwood
215. May 22, 2009 Citizens National Bank
216. May 22, 2009 Strategic Capital Bank
217. May 21, 2009 BankUnited, FSB
218. May 8, 2009 Westsound Bank
219. May 1, 2009 Silverton Bank, NA
220. May 1, 2009 Citizens Community Bank
221. May 1, 2009 America West Bank
222. April 24, 2009 Michigan Heritage Bank
223. April 24, 2009 American Southern Bank
224. April 24, 2009 First Bank of Beverly Hills
225. April 24, 2009 First Bank of Idaho
226. April 17, 2009 American Sterling Bank
227. April 17, 2009 Great Basin Bank of Nevada
228. April 10, 2009 Cape Fear Bank
229. April 10, 2009 New Frontier Bank
230. March 27, 2009 Omni National Bank
231. March 20, 2009 Colorado National Bank
232. March 20, 2009 TeamBank, NA
233. March 20, 2009 FirstCity Bank
234. March 6, 2009 Freedom Bank of Georgia
235. February 27, 2009 Security Savings Bank
236. February 27, 2009 Heritage Community Bank
237. February 20, 2009 Silver Falls Bank
238. February 13, 2009 Corn Belt Bank & Trust Co.
239. February 13, 2009 Riverside Bank of the Gulf Coast
240. February 13, 2009 Sherman County Bank
241. February 13, 2009 Pinnacle Bank of Oregon
242. February 6, 2009 Alliance Bank
243. February 6, 2009 County Bank
244. February 6, 2009 FirstBank Financial Services
245. January 30, 2009 Suburban FSB
246. January 30, 2009 Ocala National Bank
247. January 30, 2009 MagnetBank
248. January 23, 2009 1st Centennial Bank
249. January 16, 2009 National Bank of Commerce
250. January 16, 2009 Bank of Clark County
251. December 12, 2008 Haven Trust Bank
252. December 12, 2008 Sanderson State Bank
253. December 5, 2008 First Georgia Community Bank
254. November 21, 2008 Community Bank
255. November 21, 2008 Downey Savings & Loan
256. November 21, 2008 PFF Bank & Trust
257. November 7, 2008 Franklin Bank, SSB
258. November 7, 2008 Security Pacific Bank
259. October 31, 2008 Freedom Bank
260. October 24, 2008 Alpha Bank & Trust
261. October 10, 2008 Main Street Bank
262. October 10, 2008 Meridian Bank
263. September 25, 2008 Washington Mutual Bank
264. September 19, 2008 Ameribank

Britain's Best and Worst Banks for Investors

This week is dedicated to assessing the UK's best and worst banks from four dimensions:

• Customers
• Employees
• Investors
• Regulators

Having looked at the banks from the customers’ perspective on Monday and employees on Tuesday, today it’s the turn of the investment community’s view.

Now then, you could say that this one’s easy: Barclays and HSBC are a Hold, Santander’s a Buy, and RBS and Lloyds are a Sell until the UK government get off their case.

It is true that the last two years has meant that the crisis has distorted the picture, and would obviously place Lloyds and RBS in a position of weakness.

Alternatively, you could say that investing in these banks over the past few months would have given you stellar returns compared to Barclays and HSBC, as a small spike in their share price can represent ten- twenty- thirty- percent or more returns on short cycle investment schemes.

But it’s not so much the share price I want to hone in upon, but the overall assets and profitability of the banks.

Therefore, we will look at share price at the end of this blog entry, but start with looking at data courtesy of the Banker Magazine’s database.

You may remember this is the dbase that helped me to blog about the Top 20 global banks 1994-2010, and I would recommend you to subscribe to it, if you’re not already.

Anyways, it’s really hard to make a useful comparison of the banks here, as they have changed dramatically over the last decade, for different reasons.

For example, HSBC has been troubled by Household in the States, but have grown through the Asian powerhouse effect; Barclays has seen BarCap dominate the roost, even more so with the recent integration of the Lehman Brothers USA operations; Lloyds has been a steady rock, until the HBOS takeover; RBS saw a big upside after the NatWest merger but then messed up badly with ABN AMRO acquisition; whilst Santander has seen cost-income rise and fall, as they absorb the acquisitions of Abbey and, more recently, Alliance & Leicester and Bradford & Bingley.

So the picture isn’t clear-cut at all, but here’s a snapshot of assets and capital for comparative purposes (doubleclick chart below to enlarge).

Note that RBS has seen the biggest increase in Assets and Capital – not surprising as they incorporated NatWest’s and ABN AMRO’s $’s – but it’s also worth noting that the 2008 figures would have been far more distorting, so taking year’s at random isn’t necessarily the most useful thing to do.

Just to illustrate that point particularly, the cost-income ratio shows that Lloyds have been best at managing their house ... but Santander would beat them hands-down over the last five-year window, after they acquired Abbey and Sovereign, consolidated platforms and stripped out cost and waste. Maybe that’s why Santander aren’t popular with customers, but they’re definitely popular with shareholders.

Santander’s UK share price: 

 

Royal Bank of Scotland:

Lloyds:

Barclays:

HSBC:

The net:net is that from an investment view, HSBC offered the most stability; Barclays a massive bang for the buck in Q1 2009 and now tracking along nicely; Santander is a bit of a merry-go-round; whilst RBS and Lloyds are more like a roller-coaster.

Nevertheless, as a roller-coaster, you might find far better risk-return rewards right now than taking the low risk option.

Interesting times ahead, especially as the government will one day return these banks to the private sector.

I’ll watch this space for sure.

NOTE

Itzi asks the question: If I invested GBP 5000 into each of these banks shares five or ten years ago, how much money (inclusive of dividends distributed) would I have now?

My answer: it's not as simple as that, as are you looking at £5,000 invested in 2005 or 2010?  In 2005, HSBC would be #1, Barclays #2, Lloyds #3 and RBS #4.  However, if you invest £5,000 in RBS and Lloyds today, I reckon you'll get a greater return than you would from HSBC and Barclays, as these banks will be floated back into private sector just before the next election, and within five years.  When they are privatised, the 70p and 46p share prices of Lloyds and RBS respectively will be more like £4:00 and £3:00 ... a much better return.  If you want to know more, get The Banker Magazine in September, as this is their front page story.

Britain's Best and Worst Banks for Employees

This week is dedicated to assessing the UK's best and worst banks from four dimensions:

• Customers
• Employees
• Investors
• Regulators

Having looked at the banks from the customers’ perspective yesterday, this second part looks at the views of employees.

This view is actually darned hard to find out.

Although there are 400,000 staff working for banks in Britain, it’s very hard to discover any quantitative views of their employers in the public domain.

You can find subjective references, such as these two opposing views from ‘supposed’ HSBC staff:

“At HSBC employees have one credo, if there's anything wrong going on, keep your mouth shut, you never noticed it. A couple of months ago a guy detected major flaws in HSBC systems. Instead of checking it out immediately, managers did not bother for two months. Reason: managers wanted the credit as it would result in promotions. The guy eventually left in disgust as action was taken against him indirectly on other grounds for not disclosing exact details.”

Compared with:

“I read the above review, slightly in shock. All the stories, all the tales, but I wonder how much of it is drama and fiction from previous employees looking for a bit of attention. I work in one of HSBC's UK based customer contact centres, where I 'sell' loans and other lending products to customers from all different backgrounds ... I would highly recommend HSBC over any other UK based banks, especially Barclays.”

Equally, you can find plenty in social networks such as Facebook and Twitter, but nothing of much use.

For example, Facebook has this group for Barclays Bank employees, with over 2,000 members. It describes itself as: “for all those who struggle with the daily grind of working for Barlcays Bank!!”, and cannot even spell the banks name properly. It’s open to everyone, which is why there are so many members, and the posts are generally turgid:

“Please join to CFA UK Society on FACEBOOK if you`re a member or planning to take CFA exam. Exiting offers will be released soon for those who are interested in Banking and Finance career. Thank You”

or whiners about poor customer service.

The discussion threads prove more interesting. For example, the discussions: “Things you most hate about your job” has a bit more kudos:

From Jenny Campbell: “The fact that you have to be a 'B' player (internal grading system) in order to get any kind of career advancement -even when non barclays folk can clearly apply for the role (eg non experienced Trainee Mortgage Advisor).....nice!”

Gets a reply from Ashley Penny: “I think the B/C argument will never go away but really you have to see the purpose behind it. If someone is rated as 'C' they are just doing an average job, which is what they are paid to do. Yes you then have outside recruitment, but that's bringing in some new talent which has to be an option for every business and I feel that closing off promotion (and bonuses!) to C players is only a good thing. Certainly people that I have worked with have responded well to this by raising their game, which is the whole idea. If someone is just doing an average job, should we pay them a bonus? and give them opportunities for career advancement when they arent going the extra mile in their current role? It drives people to do better, rather than knowing they can just coast along and still get a bonus/payrise/move on.”

Followed by Rob Barbour: “In theory the topgrading thing is excellent, but in practice personal & departmental politics come into it. Even in Group Centre HR, which in theory should have been driving best practice for the whole group, people's ratings were basically a reflection of who the directors liked the most, and who had worked the stupidest hours. And even then, you had B5s working their a***s off til 1-2 AM regularly for no overtime, and still receiving a C rating. F***ing disgraceful.”

That sounds more near the mark of true employee transparently communicating ... until you realise these postings are over a year old and nothing much new is out there.

Of course, for a more professional view of the world, we should look to LinkedIn anyway. This was proven by our social media survey earlier this year – LinkedIn is for professionals – and so I delve a little around there.

Unfortunately, it’s also a mish-mash of groups that are semi-active but not much insight.

For example, the Royal Bank of Scotland Group has almost 4,000 members but zero discussion or postings. The ABN AMRO Group has more activity, but it’s all based around Eva Martin, an Accountant at Kerry Brothers Ltd, posting stuff about auditing and accounts.

This is lame guys!

When social networking first started, I could find out lots more about the naked truth direct from bank staff views.

What this really means is that banks have locked down their employees from leaking too much online, by making it clear that if you blab in a social network you lose your job.

Good.

That’s the way it should be isn’t it?

But then there are other things you can do.

For example, LinkedIn can track staff movements and tenure, and they can point out where the Bear Stearns and Lehman staff ended up for example:

So I did a bit of analysis of the UK High Street Banks via LinkedIn, particularly who had left whom for where and a rough calculation of attrition rates. Please bear in mind that this is totally unscientific, inaccurate and probably completely wrong, but here’s what I got:

Line colours: dark blue (RBS); light blue (Barclays); black (Lloyds); red (HSBC); and the thicker the lines, the more folks moving in each direction.

This shows that the main corridors of staff are movers from Lloyds to RBS and Barclays, and from Barclays and HSBC to RBS. I should say that the chart above may be inaccurate, but it does purely look at retail banking movements in the UK for these institutions and appears to be about right to me.

Another source of great input on this is The Vault.

The Vault is for professionals who provide views on their firms.

Their rankings of who’s happy with which banks are ususally pretty robust, so here are their rankings (based upon selecting the main UK high street bank names only):

#1 HSBC (#8 in Europe)
#2 Barclays (#11 in Europe)
#3 Lloyds (#24 in Europe)
#4 Royal Bank of Scotland (#27 in Europe)

According to the Vault, HSBC is committed to a good work/life balance with a "collegiate" culture; it is good for “worldwide opportunities, good for consumer banking” and is “still strong” as the bank that is “most unscathed by credit crunch” which means it “has survived well” and has moved from “previously third tier” to “arguably second tier now”. However, the bank apparently “lacks direction” and is too bureaucratic for individuals to make a real difference.

Barclays is a “meritocracy” with “a relatively flat management structure,” “a good mix of people from different backgrounds” and a spirit of “trying to reach goals and putting all the efforts in to get there.” Employees describe their peers as “open, fair and keen to share,” and from the start, hires “are given responsibility, and it really is up to you how quickly you progress.” In terms of making a good impression, “efficiency matters more than quantity” of work, and those who do well find it’s possible to carve out a niche “if you take the initiative and form your role”.

Lloyds is a bit of a contradiction, with several people feeling its lost its way since the HBOS takeover. They describe it as “a very, very English bank” (with an American CEO!) that can be “slow to adapt to change” due to its “silo-ed and political” structure. On the other hand, some staff think it is a “progressive, intellectually challenging and entrepreneurial culture that embraces change,” with hours that are fairly flexible. Whilst one trader works a 60- to 70-hour week, another worker spends less than 40 hours a week in the office and is happy to reveal that “there is no pressure to work long hours.” With “six weeks’ paid holiday,” private health care and a gym membership discount, it sounds pretty good to me (as a retirement home).

Royal Bank of Scotland has less commentary but is “friendly and open” where “everyone on the team puts in the hours”, but “it isn’t uncommon to put in 60-hour weeks.”

It’s all interesting stuff but there’s another factor here.

All these websites tend to focus upon professionals, management and office workers.

What is the teller’s – or customer service advisor, if you prefer – view?

Hmmm ... using Google most of what comes up is that bank teller’s are all thieves, but that’s just a one-off, not the mainstream.

Instead it's better to look at Working Mums where you maybe start to find the real truth about UK retail bank workers.

Why?

Because when you go into a branch, have you ever noticed that all the tellers are female?

Usually the one male in a branch is the manager.

That’s no problem, after all it’s well known that Britain is a nation of misogynists. In fact, you could argue that banks are doing women a favour by offering such work at low pay (typically, a branch teller gets about £12,500 a year, well below the average annual salary of £23,450), and if you look at this cahrt from Working Mums:

You can see why there’s another angle at play here.

This is because banks offer a highly accommodating work structure for many. For example, looking at the Royal Bank of Scotland, their “promotion of diversity has been recognised throughout the financial industry and beyond”, with a range of awards:

• Gold Standard Award from Opportunity Now (2008-2009)
• Gold Standard Award from Employers’ Forum on Disability (2008)
• Gold Standard Award in the Race for Opportunity benchmarking and first place ranking within the Financial Services sector (2009)
• Shortlisted in three award categories for the Women in Banking & Finance Awards for Achievement (2009)
• Placed in the Stonewall Top 100 Employers Workplace Equality Index for Lesbian, Gay and Bisexual people (2009)
• Placed in The Times Top 50 Where Women Want to Work (2010)
• Placed in the Stonewall Top 100 Employers Workplace Equality Index for Lesbian, Gay and Bisexual people (2010)

All very impressive.

But then I look at the Times Best 100 Companies to work for in Britain, and none of the High Street Banks make the lists. In fact, the largest financial firms that make the list are quite surprising:

#2, Goldman Sachs (must be the bonuses);
#11, down from #3, AMEX (strong management);
#14, down from #8, Morgan Stanley (great leadership); and
#21, Zurich (low stress and good benefits)

So what does this tell us about employee satisfaction in Britain’s High Street Banks?

I guess that staff are happy at a bank that accommodates their lifestyle of low stress, low ambition and low pay with high flexibility, whilst three-quarters of management are getting on up the chain of the bank’s slow staircase of promotion whilst a quarter are on a churn between the four main players.

Sounds like any other industry really.

And if you want to join a bank or understand their culture, my net:net comes from the Vault:

Barclays: meritocracy

HSBC: collegiate

Lloyds: English

Royal Bank of Scotland: friendly

 

Britain's Best and Worst Banks for Customers

I blogged about Santander last week and embedded the survey results on service, which actually warrant a blog entry in their own right, so here it is.

Now I love customer surveys of views on banks, but they are published too far and few between and often with poor density, so it was an unexpected delight to see that Money Savings Expert had performed a survey of over 17,000 UK consumers.

The results were published last week and here they are:

 

Yet again, First Direct on top and, yet again, Santander at the bottom.

Why do I say yet again?

Which? Magazine survey of 15,000 consumers in January 2009:

Smile and First Direct generated the highest customer scores for their current accounts (88% and 85% respectively), followed by Cahoot and Co-operative Bank (82%).  First Direct was top with mortgage customers, scoring 90% – 11% more than the runner up Yorkshire building society – and was just pushed into second place (with 78%) for savings by the Co-operative Bank (80%).John Lewis and Waitrose scored the highest mark for customer satisfaction with credit cards (90%), followed by Nationwide (87%) and Smile (86%).Abbey, which came bottom in each category – with the exception of mortgages where it came second from bottom – rejected the findings, saying there were "significant issues" with the research.

BBC Watchdog survey of over 13,000 viewers in February 2008:

1. First Direct *
2. Co-operative Financial Services
3. Nationwide Building Society
4. NatWest
5. Lloyds TSB
6. HSBC
7. Barclays
8. HBOS
9. Abbey

60% of Abbey's customers were fed up back then. 

I then wondered what this meant to bank's results, as I have a nagging feeling that Santander have been out performing most UK banks in the last two years in terms of customer acquisition.

Therefore this week will be dedicated to assessing the UK's mainstream banks from four dimensions.  Today, it's customer service.

Tomorrow, I'll give a shot at employee satisfaction.

Wednesday, investor's returns.

Finally, on Thursday, financial stability and the regulatory perspective.

This could prove interesting ...

The credit crisis was NOT a Black Swan event

One of my holiday books – I’m so geeky dull when it comes to banking – is Traders, Guns and Money, Knowns and Unknowns in the Dazzling World of Derivatives, by Satyajit Das. It was recommended to me a while ago, and has been sitting on the bookshelf ever since, like so many books I buy.

This one intrigued me however, as it was written way back in February 2006, eighteen months before the August 2007 run on Northern Rock and two and a half years before the September 2008 implosion of Lehman Brothers.

So Nassim Taleb talks about a Black Swan crisis ... this one wasn’t. This crisis was thoroughly predictable, as Traders, Guns and Money makes clear.

Rather than writing a review here, as I haven’t read it yet, I thought that Shocked Investor’s blog entry would provide a good backgrounder on this.

However, I have dived straight in to the last chapter on Credit Default Swaps (CDS) and Collateralised Debt Obligations (CDO), one of my favourite subjects.

There’s a good note in there on page 295 about these suckers. Here’s a shortened version of that note:

“CDO logic is perverse. You buy loans and other credit risk from the market, then you cut it and dice it and sell it to investors. It should be impossible to make money. Then why are CDOs so profitable?

“In the credit trading age, dealers were taking massive ‘model risk’ to provide investors with higher returns. It was the geeks and their masters who were writing the cheques; they had placed their faith in the credit models; they had started to believe in their lies. Perversely, they were showing massive profits. That’s the beauty of mark-to-model. If the model fails, the profit will disappear like a chimera.

“In 2002 and 2003, benign conditions in the credit market prevailed. Few companies defaulted; people became foolish or brave and lent to companies at ever lower returns; the credit spread on junk bonds reached record lows. Credit standards declined.

“In 2004, one bank suffered a loss of around $50 million in a single day on its credit dealt books. Nobody really knew why: it was the first tremor.”

You get the idea.

This book explained all the background to why we would see a subprime explosion and liquidity crisis ... back in February 2006, charting events going back to 2004 and before.

The book cites a court case from 2004 for example, where Barclays Capital were sued by German investment fund, HSH, for ‘misrepresentation’ after BarCap lost $151 million on one of their CDOs:

“HSH claims it was mis-sold the products, known as collateralised debt obligations (CDOs), and that Barclays then mismanaged its portfolio of CDOs in a way which further damaged the interests of investors. Barclays also stands accused of "short-selling" the CDOs for its own commercial benefit.”

Barclays argued that the losses were just due to the ‘unexpected’ downturn in the credit markets, and that HSH was a sophisticated investor and aware of the risks.

Doesn’t this sound like Goldman Sachs today?

“The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world.” — Goldman Sachs April 16th press release, in response to the SEC’s accusations

It’s a standard defence, as was BarCap’s response that it would ‘vigorously defend’ the action as they were ‘comfortable that these investments were not mis-sold’.

In 2004, Barclays settled the case with HSH a few weeks before it came to trail as they wanted to avoid the headlines.

A similar case was brought against Barclays and Bank of America at this time by the Italian Banca Popolare di Intra. Again, it was settled out of court.

If you’re interested in this stuff, there’s a really good presentation on CDO litigation from Jones Day, a law firm, at a London conference in March 2008.

Presentation: American and UK Perspectives on CDO Claims

Here’s a few of the slides:

What triggers litigation?

• Unexpected and large potential losses
• Tripping of over-collateralization or similar tests
• Disagreement over appropriate priority of payments
• Liquidation of portfolio assets
• Collateral calls
• Poor documentation where ambiguity = opportunity
• An unwillingness to compromise or inability to do so due to an encumbered balance sheet

What are the claims?

America’s claims are based upon:

• Sales Practices:
• • Misrepresentations and omissions
  • Collateral contracts/promissory estoppel
  • Suitability
• Federal securities fraud claims
• Mismanagement; Breach of fiduciary duty
• Breach of contract
• • Contract interpretation
  • Third party beneficiary standing
• Aiding and abetting breach of fiduciary duty/fraud
• Civil conspiracy
• Class actions?

UK claims are based upon:

• Deceit
• Misrepresentation (if contract) based upon being innocent/negligent/fraudulent
• Breach of contract: contract term/implied term (reasonable skill and care in management of funds)
• Negligent mis-statement (if no contract)
• Breach of a duty of good faith/duty to inform

Who brings the claims?

• CDO investors
• • Senior Note holders vs. Income Note holders
  • Institutional vs. individual investors
  • Hedge funds/ fund investors.
  • Liquidators and trustees of insolvent CDOs
• Swap counterparties
• Mono-line insurers
• Warehouse agents

Who gets sued?

• Placement agents\underwriter
• Portfolio managers
• Financial advisors
• Administrative agents
• CDO directors and officers
• Rating agencies
• Mono-line insurers
• Accountants
• Other professionals? Law firms?

Interesting and I’ll bet this rumbles on for years to com.

Meanwhile, if all this was rumbling along back in 2004 such that a book could be written about it in February 2006, how come no-one – including yours truly – knew what was really happening until the poop hit the fan?

 

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 ...

Things worth reading: 17th February 2010

Things we're reading today include ...

Barclays and Bonuses

Barclays reports profits up 92% to £11.6 billion - The Independent
Bankers pocket £2.7bn bonuses as record profits announced - The Independent
Diamond says forget bonuses and be proud - Financial Times
Barclays has changed the rules of the game and bankers should take note - The Telegraph
Debt of honour - The Times
Million dollar men - BBC
Regulator backs EU-wide bonus rules - Financial Times

Insider Trading

Record fine for insider trading - BBC
The Cazenove connection: ex-broker tried for ‘inside deals’ - The Times

Companies

JP Morgan's $1.7bn purchase of RBS Sempra doesn't include US assets - The Telegraph
Deutsche Börse to ramp up cost cuts - Financial Times

Cards

Credit card rates 'at new high' - BBC
UK firms 'forced to use credit cards to stay afloat' - The Telegraph

Markets

Eurozone expects 'fragile' growth - BBC
Banks 'still restricting loans' - BBC
Financial innovation can be harmful, says FSA's Lord Turner - The Telegraph
Inflation rise just 'temporary' says Bank governor - The Independent
Hank Paulson calls for tighter US financial reforms - The Telegraph

Quote of the Day:

"You have to be the most arrogant pompous wanker yet to grace the Bloomberg studio."
Email from Jamie after my appearance on Bloomberg yesterday ... love the feedback!