The Financial Services Club's Blog

How will the world look post-crisis?

I’ve been debating some future presentations with various folks today, and a little ray of light went off in my head.

The light was triggered by a comment: “can you talk about what impact regulatory change may have on bank to corporate relationships using examples historically?”

The question was really asking about the unintended impact of regulatory change in the past and what it might mean for their future, but it made me think about something else.

Each time we have seen a major bubble burst, the cause has been a coagulation of several forces of change.

Forces for change come from four major directions: Political, Economic, Social and Technological (PEST).

These forces for change are used in many ways, and can be seen in my banking history discussions (and soon to be published book) which talks about many historical periods including the Italian Renaissance, the Great Depression and the Credit Crisis.

In each of these, we can see Political, Economic, Social and Technological forces working together at the same time to drive change.

In the fall of the Renaissance Italians, it was a mixture of change between the break from the Catholic Church with the Protestant and other movements (Political), mixed with the ruin of the Italian banks due to over-extension of credit to overseas Royal Houses (Economic), along with expansion of merchant shipping and colonisation (Technological).

In the Great Depression, we saw the end of the Industrial Revolution (Technological) combined with post-war wrangling over the gold standard (Political and Economic).

Right now, we see a major world of change too.

We have the rebalancing of power between America and Asia/China (Economic) combined with an internet revolution that is connecting everyone on the planet (Technological), leading to changes in society, where a Molly Katchpole can reverse a bank’s policy and an #Occupy movement can change global thinking (Social).

The Political outcome of all of this is what is driving bank regulations right now.

And the outcome of all of this will be a massive change.

A New World Order?

Probably not.

We already have a New World Order as China is expected to be the world’s largest economy by 2018 (ten years ago, it was estimated to be 2047).

But we will see a restructured playing field and one that is not level.

We can see this already as one major economy (America) bans prop trading whilst another (UK) just separates prop trading from retail bank operations.

Even more pronounced are the differences between the US and EU on OTC Derivatives regulations and how to define and regulate Systemically Important Financial Institutions (SiFi).

From CME Group in October 2011:

“In an ideal world, global financial regulators would function something like a team of horses, with policymakers in the United States, Europe, Asia and elsewhere all pulling at once in the same direction, and moving toward a common goal.

“Reality is turning out be far more chaotic, however. Regulators and lawmakers are having a tough time forming a consensus even within their own national borders, let alone across international boundaries. The result is turning out be a patchwork of overlapping and often inconsistent approaches to regulation in the aftermath of the financial crisis that gripped global markets in 2008 and 2009. Many financial experts fear that the inconsistent global regulatory framework will alter the flow of capital around the world, as trades are directed to the cheapest jurisdiction, a process known as regulatory arbitrage.”

So we end up with a world where the politicians are trying to react to the implosion of markets at the end of another revolution – Globalisation – and find that they are seriously lacking consistency, vision, leadership or agreement.

The Eurozone is one of the best illustrations of this, although America and China aren’t guaranteed to come out of this stainless as the American elections will change ground again, as will China’s challenges of a property market bubble and inflationary pressures.

All in all, the PEST approach to the world today says that we are going through a momentous change from all angles – Political, Economic, Social and Technological.

Where will it end up?

Probably in a place no-one expects and one which, on this blog, I’m going to avoid predicting decisively.

From Reuters:

“By 2020, the workforce in western Europe will shrink by 2.4 percent, including a 4.2 percent contraction in Germany, according to a Boston Consulting Group study.

Looking further ahead, HSBC projects that Germany's working population will shrivel by 29 percent by 2050, Russia's by 31 percent and Japan's by 37 percent.

Over the same period, the population of many African countries will double. Nigeria will log a rise of 3 percent a year in its workforce - in contrast to a 1 percent decline in Russia and Japan - and will have as many people as the United States by 2050.

On current projections, Pakistan will be the sixth most-populous nation by the middle of the century. And the Philippines could be the world's 16th-biggest economy, HSBC reckons.”

 

40% of City workers to lose their jobs

I’ve recently been thinking about headcount cuts.

It’s always hard …

And it's getting harder.

For example, I wrote in August that thousands of bank jobs were being cut, adding up to an expectation of 15,000 City jobs this year.

Each job loss represents a significant loss to the economy, especially those in the City:

“Based upon an average salary of £150,000 and income tax of 50 percent, employer national insurance of 2 percent and employee national insurance of 2 percent, this works out at an average lost tax income per lost City job of £81,000 per year, or a total loss of about £1.3 billion in tax revenue.  To put this into context, financial services workers paid a total of £18 billion income tax for the tax year 2009/10, or 15 percent of the UK total, so this year's redundancies alone could lower the sector's income tax contribution by about 7 percent.”

That doesn’t include all the job losses at Lloyds Banking Group (43,000 or more job losses)  and Royal Bank of Scotland (28,000 generally plus a further 5,000 just announced in the investment bank).

Nor does it even look at the USA figures, where Bank of America recently announced 30,000 job cuts, a similar number to those recently announced by HSBC.

In fact, every bank is cutting … how far could it go?

According to one leading light in the City, Mary Caroline Tillman – shortlisted for Woman of the Year, Head of the Global Financial Practice with headhunter firm Egon Zehnder, and formerly Managing Director and Chief Operating Officer of JP Morgan's European Advisory Business – the losses will rise to around 40% of all City jobs.

In an interview over the weekend with the Independent, Mary said the following:

“The Masters of the Universe are facing a really tough time.  The shake-out is only just beginning after the crash. There is a big consolidation still to come, which means there will be far fewer banks; a 40 per cent cut in jobs will be the 'new normal'. This is because of the tougher regulatory environment.”

A 40% job loss in the City would spell disaster.

For example, the article reckons that there are about 360,000 people working in the City and some 670,000 in New York's securities industry (this does not take into account all the ancillary and related services from accountants and lawyers to bar staff and restaurants).

If 40% disappeared in London, based upon my earlier calculations, which would be 150,000+ job losses.  A loss of around £13-£15 billion a year in tax revenue … or more.

I wonder whether the government really wants this scenario therefore, and the Occupy Wall Street brethren.

Meanwhile, as the industry does go through its transformation from reckless risk to wrestled risk, it was interesting to see the change Mary sees happening in the core investment community of London.

“The restructuring means a different kind of leader is emerging. They are coming from the more functional areas. You can see that, with risk officers such as Robert Le Blanc at Barclays and Marc Moses at HSBC, who are now at the top … Boards want the finance guys, accountants, risk specialists, those with knowledge of IT and compliance.  These are the future Masters of the Universe … and these new bankers are determined to show that banking can be a decent and good business.”

Good.

 

 

 

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

 

 

 

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 

 

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: 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?

 

Why First Direct works

After a dinner meeting with First Direct (FD) at the FSClub last Monday; an interview with Paul Say, CMO of First Direct; last week concluded with a blogoblast between me, Brett King and Visible Banking with Matt Colebrook, CEO of FD.

Anyone would think they were paying me to advertise their business which, just to make clear, they are not.

So why am I writing and indulging FD so much?

Because I’ve known them 21 years since their inception and launch.

Because they’ve succeed in creating a completely different bank business model in the UK, and it works.

Because they’re the best bank in Britain for customer service, as recently proven.

And yes, because they’re indulging me a little bit, by supporting the FSClub and providing lots of input on where they see banking going in the future.

So here’s the low down.

First Direct were launched in 1989, when most people could only get into a bank branch during the bank’s restricted hours of opening.

I talked about this recently in an article and video with the Independent:

“Twenty-one years ago banks were completely in control of the way that they interfaced with their consumers. Power was centralised around big institutions in business, the media and politics, and banks were no exception to this. They opened between 9:30 and 3:30 and closed at weekends. If you wanted to interact with your bank, you did it very much on their terms and in a branch.”

This was when First Direct launched.

Now I remember that time well, as I’d been involved in some call centre finance trials and everyone told me they wouldn’t work.

The banks believed the technology was too early – back then, people had old rotary telephones:

And people were just switching over to these new fangled, digital, pulse telephones:

And this is just 21 years ago!

The mobile was but a flash of inspiration on Motorola’s R&D screen:

So the banks said that (a) the telephone technology was not mature enough and (b) that customers did not like the service they received on the telephone.

Well, no wonder.

This is because tellers from branches were suddenly shoved into faceless communications with people they weren’t trained to deal with via telephone; using processes and scripts that were tightly controlled, and made the whole thing an awkward exchange between customer and bank.

First Direct overcame this by using a human approach.

They gave staff general guidelines and called them people and associates, rather than employees or staff.

They put them in teams to trade off each other, and the teams had fun names like “The Contortionists: we bend over backwards for our customers” (I’d like to see that).

There were not scripts and they were told to deal with customers as though they were friends.

The result is that First Direct rapidly expanded as a human bank.

The back office technology was written in old BASIC programming, with very basic 3270 green screen access. Bear in mind, the original call centre bank was created by Midland Bank, prior to HSBC’s assimilation, and you get an idea of why it would have been cheap.

Funnily enough, 21 years later, Matt says they are using the same old back office technologies.

So this bank is nothing about technology innovation. It’s all about process and people innovation; cultural innovation; human innovation.

For 21 years the bank has grown and evolved to suit those people who want to use them, who are typically higher net worth, internet-savvy, educated professionals.

Today, the bank sits firmly within the HSBC empire as a model of how to do remote, bank without branches servicing.

This is illustrated by the fact that the core call centre technologies are about to go through a refresh to be the platform for all of one HSBC’s global call centre platforms.

But it’s still a bank about people and human interaction.

For example, Matt retold a story last week of one call centre operator who’s bag was lost on a train with her ticket, so the keen young service guy dived down to the train station with cash in hand to pay for her train ticket.

That’s service.

“At a cost”, I hear someone shout (and several did at the Club meeting last week).

Sure, it’s at a cost. But First Direct is a bank without branches.

They exist as a bank that has no overhead bricks and mortar infrastructure.

Therefore, if their call centre operator takes five minutes more than their competitor’s to answer a call and resolve a problem ... it’s ok. Because their competitor has $25 per minute in extra costs to cover wasted branch space.

What about the future?

Well, as mentioned, the bank is going through a technology platform refresh and will continue to be focused upon gaining and retaining their core high net worth, higher educated client.

Whilst HSBC will be focused upon how to combine the wonders of remote servicing without scripts through a human approach to a global operation that can live in harmony with branch services, as branches close.

Exclusive: Interview with First Direct

I'll post a couple of unique and exclusive items here in the next few weeks to celebrate First Direct's 21st Birthday, especially as the FSClub hosted their CEO to a dinner last night in this respect.

This follows our celebration of PayPal's 10th Birthday, so we're getting a reputation for celebrating the birthdays of disruptive banks.

Anyways, as a taster of this, here's an interview between Paul Say, Chief Marketing Officer at First Direct:

... and myself.

Chris Skinner: According to Paul Volker the last great innovation in banking was the ATM, but do you think being a bank without branches is innovative?

Paul Say: When we launched back in 1989, it was absolutely revolutionary. We suddenly launched onto a market that was used to going to a branch Monday to Friday, a branch that was not open at weekends, that only opened around certain hours – 9 to 5 if you were lucky – and you had to queue up for your money. If you needed to see your manager, you had to make an appointment. Suddenly we launched this telephone banking service that was available 24*7, 365. You could phone us on Christmas Day and New Year’s Day. That was absolutely revolutionary at the time. Today, it is a hygiene factor. A lot of the things that First Direct does or starting out doing are now hygiene factors for banks, but certainly when we started out it was absolutely revolutionary.

Chris Skinner: What is it that makes you different if it’s just a hygiene factor today?

Paul Say: I believe it’s the magical rapport we create with our customers, and that comes down to the people. That’s not just the person who deals with your basic banking calls, it’s also the person who deals with your digital problems if you have issues with internet or mobile banking. It’s fundamentally born out of respect for the customer, and putting the customer in control. It’s giving the customer banking on their terms, helping them to do what they need to do with their money when they need to do it. I fundamentally believe that’s the magic that we create. You can’t bottle it. That’s why it’s not been replicated. Over time, people have hired people from First Direct. We see some our people join other organisations, but fundamentally they cannot replicate it in the scale we have achieved here.

Chris Skinner: So is your innovation your culture?

Paul Say: Absolutely. We totally believe that people matter more. It’s interesting that in the digital age, people are more important now than they’ve ever been before. For example, I was talking with a colleague the other day about a business problem we are trying to solve. We went back to some papers we wrote five years ago. Back then, we said we are not a telephone bank or internet bank, but that we are a digital bank, with the people to prove it. Digital is so much wider now as a term, and so much more meaningful. It embraces telephony, it embraces mobility, it embraces the internet, but it also embraces all the new platforms that are emerging, such as the iPhone and Android. I totally agree with that cultural point therefore, and also believe in the human element of this as well. There is a movement towards authenticity and, in this technical age, that’s really tough to create and particularly on digital platforms. Creating that emotional chemistry that you get as the takeaway from the experience of our call centre for example. You cannot just create that magic. On reflection, that’s the single biggest revolution that we created in the banking industry. It’s also the single biggest puzzle we try and solve day in, day out.

Chris Skinner: How do you keep that culture to be different thought? For example, a lot of the banks measure call centre staff using metrics such as the number of calls they get through in a day with satisfactory closure within x minutes, and so on and so forth. How do you measure staff effectiveness?

Paul Say: Those environments where you are being asked to hit certain average handling times, queues on the boards and so on, we have a similar sort of philosophy but we try to make it more playful and fun for people to achieve those standards. That comes through doing odd things. For example, it is appraisal time at the moment, and so we have Wig-Wams dotted around the building because we want people to go for a huddle with their Big Chief, so to speak. We just try to lighten the mood and make it less pressurised. We also empower our people so that if a customer conversation is getting complicated on the phone, we say that this is OK. That’s because the customer is the centre of everything we are trying to achieve here. So we have those standards and measures, but we take an adult approach to those metrics and standards and also try to make it fun.

Chris Skinner: Do you think technology is the main driver of innovation?

Paul Say: No, it’s an enabler but not a driver. For example, we recently started to use social media type technologies – community forums and that sort of thing – which is by no means radical, but nevertheless a technology innovation. We knew that customers had great experiences with us, and that was because they had real conversations with us and those conversations are two way, and that is what we wanted to provide in our social media delivery. So the way we look at innovation is that there is a brand dynamic that is key as part of that innovation. The brand dynamic for First Direct is that we create a magical rapport with our customers through great conversations. Equally, there is a cultural dynamic. So the technology must be married with the brand and cultural dynamics if it is to be appropriate and effective. For example, we have a campaign at the moment called Talking Point (http://www.interactive.firstdirect.com/enthuse.html). Talking Point allows our customers to talk live and unedited about money and much more, including First Direct. The cultural dynamic driving that idea is that there is an element of mistrust generally in the banking world right now, and we wanted to take our brand dynamics of magical rapport of great conversations, and marry it with this cultural dynamic of mistrust. The result is that we created Talking Point to allow people to search for authentic experiences with a financial institution they can engage with. That is giving us a position in the marketplace of transparency and authenticity. So I’m a big believer that technology is an enabler of innovation, rather than the single driver, as there are other factors such as brand and cultural dynamics. I also believe this because you can sometimes try too hard to apply technology to your brands, and customers can reject you if you try too hard. That is why it took us at least eighteen months to find a place for the whole world of social media, and it is because we wanted it to feel natural. We were not going to force the technology and that experience on our customers if it didn’t make sense in the context of our brand and the experiences they were having with us. Does that make sense?

Chris Skinner: Yes, although it raises some questions too. For example, most banks apply technology for cost savings, but you seem to be looking for technology to enhance customer experiences.

Paul Say: That’s right. When we launched text message banking for example, we knew there was something in SMS messaging on phones which was about alerting customers and keeping them up-to-date. We actually positioned text message banking as being like a sixth sense when we launched it. The fact that we would send you a text alert when you’re about to go overdrawn, for example. Isn’t that great, to have a bank that alerts you before you go overdrawn?

Chris Skinner: But other banks would see that as bad, as they can make money out of customers being overdrawn. That’s why they won’t do social media or twittering or blogging, because it’s just marketing froth. It doesn’t make money.

Paul Say: It depends what you see as being of value. If value is pounds and pence, then does it really shift the dial on its own? No it wouldn’t. But if you see it in the context of contribution in terms of brand equity and the company credentials that you create around doing this sort of thing, then there’s inherent value in that. There’s also value in terms of word of mouth. People start talking about you when you do things like this on their terms, not the bank’s terms. On the back of this, business comes. A key thing here is that recommendation is as good as writing the business, as people do work on word of mouth, particularly in this age. So don’t look at this just in terms of bottom line contribution, look at it in terms of your brand credentials, customer service experience credentials, and look at it in terms of how customers will talk about you outside of the bank, in terms of word of mouth and recommendations. First Direct really benefit from that. We are the UK’s most recommended bank and have been for a very long time. We do benefit from that, because we know that when people join us, they are joining us because they’ve heard great things about us or somebody has personally recommended them.

Chris Skinner: That raises two things however. One is that if you are that successful, how come you are not Britain’s biggest bank; and secondly, if you have that expectation when customers join you, does it set the bar too high so that customers might be disappointed?

Paul Say: On the latter point, we have a satisfaction guarantee. The first thing is that when people join us, we give them £100 as a warm welcome to thank them for switching, as it’s a bit of a hassle to change your bank. But we also put our money where our mouth is, as we promise that if they don’t like the switch then we’ll move everything to wherever they want to go afterwards and give them another £100 to say sorry. We’re absolutely confident that we can offer a satisfaction guarantee when you join us, because we know we are that good and we are willing to put our money where our mouth is to prove it. That’s not arrogant. It’s just that we are confident in the experiences that our people are creating with customers.

Chris Skinner: So why aren’t you the biggest bank in Britain?

Paul Say: I can best answer that by saying that, when we started out, we really played to a part of the community who were completely disenfranchised by their banking experience. So therefore, we grew very quickly, because a lot of people decided “I’m going to switch, and it’s worth going through the pain of switching”. We continue to occupy that place in the marketplace, the switchers. In fact our target market is affluent, professional people, which is a very niche marketplace of the total switcher market. So we’re not growing by ten market share percentage points every year. What you find is that we deliver small organic growth, but when we bring people in we build the relationship and deepen the relationship with them. Therefore, we grow their product holdings, and that is our real focus. Rather than just acquiring new customers for one single product, we would rather acquire one customer for many products. The result is that we have a group of very profitable customers banking with us, who have extremely high levels of satisfaction and therefore recommendation of our services to their peers.

Chris Skinner: Finally Paul, back to technology and innovation. What do you think will be the key technologies for changing the customer experience in the future?

Paul Say: Well, we bought some iPads for the team here to trail, and when I took the iPad home my three-year old daughter picked it up. Watching her interaction with it made me realise that the whole principle of keyboards will be redundant soon. It certainly will be for my daughter as she’s already using touch screen; she’s using her fingers; she’s interacting directly with the screen, rather than through a keyboard. So creating touchscreen interfaces and experiences for our customers is going to be a really interesting area and a critical one to explore. The other area is any technologies that help to create a human engagement. The fact that you’re touching the screen is a human engagement, as it’s creating a chemistry between you and the experience of the brand that you might be interacting with via the device. That humanness, and bringing that humanity into the digital world, is going to be the next space.

Chris Skinner: What about video as a channel, as I know you’ve trialled that?

Paul Say: We’re pondering that right now at two levels. Absolutely, the idea of talking to a screen is going to be a place that we’re going to have to embrace and confront in the future, but there’s one thing about First Direct that is key here, and that is the mystique about that voice you hear on the end of the phone. As a brand, creating a visual representation of First Direct on the phone does raise the question: is that a good thing? In particular, as people create pictures and have a visualisation of the person on the telephone they are talking with, and where they are. That’s all part of the experience o f First Direct, and I wonder if we might erode the mystique and some of that magical rapport as technology moves forward.

Chris Skinner: I guess you’ll just have to give everyone 3D avatars to get over that one Paul. Meanwhile, thank you for your time today and I wish you well with your future innovations.

Paul Say: Thank you.

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

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

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

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

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

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

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

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

Back in 1994, Japan ruled the world.

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

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

Not the case.

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

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

Bank histories reflecting our histories

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

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

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

Poor old Anne Loubert.

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

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

So why all the history today?

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

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

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

 

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

A living and breathing history of society in fact.

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

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

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

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

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

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

In the meantime, does anyone know what this is?

Answer on Monday.

So not PC but ...

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

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

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

Well, look more closely ...

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

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

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

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

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

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

It was 2002 when this ad first aired ...

... and it's true.

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

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

China will be world's largest economy by 2035

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

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

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

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

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

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

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

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

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

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

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

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

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

Here are my brief notes:

Asia - aren’t you glad to be here?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What about inflation?

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

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

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

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

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

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

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

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