Weathering the Storm in UK Retail Banking

Table of Contents

OVERVIEW

• Catalyst
• Summary

EXECUTIVE SUMMARY

• There has been a marked change in consumers' financial attitudes and behavior
• A tougher regulatory regime will constrain the future activity of UK banks
• UK banks will need to focus on cost reduction to help improve their margins
• Opportunities do exist for banks to increase their revenues

THE IMPACT OF REGULATORY MEASURES

• Datamonitor predicts the UK banking environment will remain risk-averse and conservative over the next five to 10 years
  • Lessons can be learned from past mistakes in retail banking
  • The current crisis is likely to result in a significant increase in the amount of regulatory intervention

• Regulators are set to impose strong and potentially cumbersome regulation on financial institutions
  • Each proposed regulatory reform has been scored on its likelihood of implementation
  • The regulatory authorities are set to bring in a raft of macro-prudential measures
  • Macro-prudential policy will be pushed to the forefront of new regulatory principles
  • Micro-prudential measures for individual institutions are high on the agenda for regulatory reforms
  • An overhaul of mandatory capital and liquidity ratios will restrict lending
  • The current regulatory reform will lead to more international co-operation on regulation
  • Increased regulation of cross-border activity will limit the number of foreign-based competitors in the UK
  • Overzealous regulation could have a damaging impact on London as a major financial center
  • Individual product regulation is generally seen as too distortive to be beneficial
  • Individual product regulation is too distortive for it to be introduced effectively
  • Regulators look set to come down hard on hedge funds and short sellers in an attempt to curb risk taking
  • The current crisis has been blamed on excessively risky activities and hedge funds look set to bear the brunt of regulation
  • More intrusive regulation and increased communication with consumers are other measures that regulators are keen to enforce
  • Intrusive, direct regulation is an important change that will have a significant impact on banks

• Consumer attitudes show a fundamental change in their views towards financial services providers
  • Consumers are reducing the amount of credit they use
  • Consumers are looking to save more and cut down on their credit card spending
  • Consumers are aware of what they should be doing during the recession although it remains to be seen how many will reach their goals
  • Consumers trust online price comparison sites more than banks and building societies

• The future banking environment could vary significantly depending on the extent of the new regulation that is introduced
  • Under a conservative scenario tight regulation makes life difficult for banks and consumers
  • Under a liberal scenario banks will enjoy slightly more regulatory freedom, which should be beneficial for the economy

ACHIEVING SUSTAINABLE COST-SAVINGS IN A LOW-MARGIN ENVIRONMENT

• The past actions of many retail banks have come back to haunt them
  • Banks' behavior has drawn a huge amount of criticism
  • Changing the minds of a cynical public will require prudency and a significant campaign of goodwill

• Banks need to revisit their business models to improve cost efficiency
  • The cost efficiency of all the major UK banks, except Abbey, deteriorated between 2007 and 2008

• Crisis brings the opportunity for clear strategic gains
  • A cost-saving strategy needs to be board-driven and all encompassing

• Cost management should be targeted to where it will really make a difference
  • Cost-savings efforts should be channeled appropriately so that they prove to be sustainable

• Sustainable cost-savings must be the goal of a retail bank cost management program
  • Staff should be involved in cost-cutting measures
  • Significant cost-savings from process re-engineering are diminishing
  • Combine green initiatives with cost-savings to improve company profile and raise staff awareness
  • Outsourcing can be an important way to save on operational costs but it can be a sensitive issue
  • Emphasizing outsourcing can detract from the need for better customer focus

• There are opportunities for banks to bring the customer closer and achieve cost-savings
  • Banks should utilize available technology to achieve cost-savings and stay in regular contact with their customers
  • Banks can utilize technology to ‘go green' , save on costs and build a credible corporate image
  • Banks can reduce costs by rationalizing the portfolio of products and services offered

• A new model of retail banking has less branch staff but greater diversity in the range of work they are able to do
  • Banks need to optimize their utilization of staff and refine service levels

OPPORTUNITIES FOR GROWTH IN A LOW-MARGIN ENVIRONMENT

• Many banks have struggled during the credit crunch, but the more successful ones have found strategies to adapt
  • The large UK banks have seen declining revenues whereas their Spanish counterparts have performed well
  • Most of the largest European banks have seen significant drops in profit levels

• A coherent strategic plan can lead to strong revenue growth for financial institutions
  • Growth Strategy 1: international acquisitions in emerging markets
  • Growth Strategy 2: develop a stronger offering in more marginal products
  • Growth Strategy 3: focus on the core fundamentals of the retail banking model

• Innovative tactics are a good shorter term method to target everyday consumers
  • Growth Tactic 1: mirror the large high street retailers by offering discounts and ‘sales'
  • Growth Tactic 2: promote a return to ‘careful' and ‘sensible' banking
  • Growth Tactic 3: target profitable customers
  • Growth Tactic 4: Invest in more face-to-face contact
  • Investment in their branch network coupled with longer opening hours can further entice more customers

APPENDIX

• Supplementary data for The Future of UK Retail Banking
• Supplementary data for Achieving Sustainable Cost-Savings in a Low-Margin Environment
• Supplementary data for Opportunities for Growth in a Low-Margin Environment
• Definitions
  • Credit default swap (CDS)
  • Glass-Steagall Act
  • Macro-prudential regulation
  • Micro-prudential regulation

• Methodology
• Bibliography
• Further reading
• Ask the analyst
• Datamonitor consulting
• Disclaimer

TABLES

• Table: Impact of potential macro-prudential regulatory measures
• Table: Impact of potential micro-prudential regulatory measures
• Table: The impact of cross-border regulatory measures
• Table: GFCI index of top financial centers, 2007 - 09
• Table: The impact of individual product regulation
• Table: The impact of measures to curb excessive risk-taking activities
• Table: The impact of other regulatory measures
• Table: Lloyds TSB greenhouse gas emissions
• Table: Lending to individuals, Q1 1988 - Q4 1996
• Table: Lending to individuals, Q1 1997 - Q4 2005
• Table: Lending to individuals, Q1 2006 - Q3 2008
• Table: Household debt as a proportion of income, 1987 - 2007
• Table: GFCI index of top financial centers, 2007 - 09
• Table: Cost/income ratios of major UK banks, 2007 - 08
• Table: Total advertising expenditure by UK banks, 2008
• Table: Number of customers per retail branch, 2008
• Table: The number of retail branches and customers by bank
• Table: Revenue data for top 10 banks by market capitalization in April 2008
• Table: Profit data for top 10 banks by market capitalization in April 2008
• Table: Advertising expenditure, 2007 and 2008

FIGURES

• Figure: The majority of respondents said that they plan to save more in the future
• Figure: Most UK banks witnessed rising cost/income ratios between 2007 and 2008
• Figure: With the exception of the Spanish banks, most banks saw profits decline or stagnate
• Figure: Total lending experienced strong growth between 1992 and 2004
• Figure: Household debt as a proportion of income fell away after the recession of the early 90s
• Figure: The majority of consumers do not intend to use credit to fund their lifestyle
• Figure: The majority of respondents said that they plan to save more in the future
• Figure: The majority of respondents had saved more over the last six months
• Figure: Banks and building societies rank among the most trusted financial institutions
• Figure: Most UK banks witnessed rising cost/income ratios between 2007 and 2008
• Figure: Total advertising expenditure by banks and advertising expenditure per customer, 2008
• Figure: Citi uses texts to connect with customers based on their individually-defined criteria
• Figure: HSBC' s virtual forest saves the bank money and appeals to green customer sensibilities
• Figure: BNZ offers tailored packages to its customers from a limited range of products
• Figure: There is a wide range of customers per retail branch in UK banks, 2008
• Figure: Most banks experienced a drop in revenue in the six months to June 2008 compared to June 2007
• Figure: With the exception of the Spanish banks, most banks saw profits decline or stagnate
• Figure: Advertising expenditure on savings products increased sharply in 2008
• Figure: The style of HSBC' s website is reflective of the overall economic situation in the UK
• Figure: BNP Paribas has a variety of offers available to its customers
• Figure: A large amount of the page is taken up advertising the current account
• Figure: The Discover Motiva card has a number of special offers
• Figure: BNP Paribas' s section for young people could drive future revenue
• Figure: Lloyds lists the extra features available with each value-added account type