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Weathering the Storm in UK Retail Banking

Datamonitor
June 10, 2009
13 Pages - SKU: DFMN2290626

Abstract Table of Contents Search inside this report Related Reports

Countries covered: United Kingdom

Introduction

The recent banking crisis has prompted calls for a tighter regulatory regime, which together with the harsher economic climate will force banks to adopt new strategies for cost-cutting and revenue maximization in order to safeguard their future.

Scope

Addresses the impact of new regulation on UK retail banking.
Details the opportunities that exist for UK retail banks to achieve long-term cost-savings.
Highlights areas where banks can seek to grow revenue in the new environment.

Highlights

An era of tougher regulation is approaching, which will have fundamental implications for the way in which banks operate. The extent of these changes will depend on how restrictive the new regulatory environment is.

There is therefore a renewed imperative for banks to seek out ways to reduce costs. Strategies that favor long-term over short-term cost-savings should be pursued.

Coupled with the necessity for cost-savings is a requirement for a focus on revenue growth strategies that favor a move away from the high-risk approaches of the past few years.

Reasons to Purchase

Gain an insight into which new regulatory measures are most likely to be introduced.
Identify key areas where costs can be saved while still promoting a customer-centric banking model.
Gain an insight into how the longer term strategies being used by banks can present opportunities for revenue growth.

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; Table of Contents; Table of tables; Table of figures; 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; Counter-cyclical capital buffers would put a constraint on lending during an economic boom; 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; The collapse of Landsbanki and the Icelandic banking system has led to calls for reform of the system; Overzealous regulation could have a damaging impact on London as a major financial center; Banks must prepare to deal with regulation that will limit their power and may see talent moving abroad; Adjustments to the tax regime could lead to an exodus of top talent; 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; Economic growth will be tempered by a more restrictive regulatory regime; Tougher regulation is not an unconditionally positive step regarding the level of competition in retail banking; Consumers would find more restrictions in place on their banking activities; More direct regulation will play a part in encouraging banks to improve their service and raise consumer welfare; Under a liberal scenario banks will enjoy slightly more regulatory freedom, which should be beneficial for the economy; The economy will rebound more quickly but regulators will need to be careful not to let it overheat; The level of competition may suffer if measures are not taken to curb dominance; Consumer welfare can be augmented through a subtle yet more hands-on approach than before; A liberal regulatory model could lead to a return to excessive credit if it is not managed effectively; 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; Costs which are usually targeted initially are precisely the ones that creep back up once the pressure is off; Reducing cost of goods sold is a more strategic approach to cost management; Sustainable cost-savings must be the goal of a retail bank cost management program; Staff should be involved in cost-cutting measures; Innovative example: KPMG offers staff choices to help reduce the firm's costs; Significant cost-savings from process re-engineering are diminishing; Combine green initiatives with cost-savings to improve company profile and raise staff awareness; Innovative example: Lloyds TSB Group is tackling climate change initiatives at a central level and involving employees in its day to day business decisions; Green cost-saving initiatives should come from employees; Sustainable cost-savings: the little things add up to make a significant difference; 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 should target their customer campaigns in order to maximize efficiency; Innovative example: Citi uses texts to achieve cost-savings and stay connected with customers; Banks can utilize technology to 'go green', save on costs and build a credible corporate image; Innovative example: HSBC goes green, saving costs and eliminating paper wastage, while promoting corporate credibility; Banks can reduce costs by rationalizing the portfolio of products and services offered; Innovative example: BNZ offers tailored packages to its customers from a limited range of products; 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; Problems in Eastern Europe mean that the region no longer presents an opportunity for further growth; Growth Strategy 2: develop a stronger offering in more marginal products; The hardening of key general insurance markets also presents revenue-generating opportunities; Growth Strategy 3: focus on the core fundamentals of the retail banking model; Advertising expenditure on savings accounts doubled in 2008 compared to 2007; 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'; HSBC has captured the zeitgeist with its sale and special offers promotion; BNP Paribas is offering a variety of discounts through its website; Growth Tactic 2: promote a return to 'careful' and 'sensible' banking; NatWest is targeting new current account holders through its website; NatWest's MoneySense initiative can help consumers to better manage their finances; The Discover Motiva card provides consumers with a bonus for regular repayments; BNP Paribas is helping young people to rent an apartment; Growth Tactic 3: target profitable customers; Lloyds TSB's value-added account options allow for greater differentiation among its customer base; Growth Tactic 4: Invest in more face-to-face contact; Flexible opening times can raise revenue; 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
List of Tables: Table 1: Impact of potential macro-prudential regulatory measures; Table 2: Impact of potential micro-prudential regulatory measures; Table 3: The impact of cross-border regulatory measures; Table 4: GFCI index of top financial centers, 2007-09; Table 5: The impact of individual product regulation; Table 6: The impact of measures to curb excessive risk-taking activities; Table 7: The impact of other regulatory measures; Table 8: Lloyds TSB greenhouse gas emissions; Table 9: Lending to individuals, Q1 1988-Q4 1996; Table 10: Lending to individuals, Q1 1997-Q4 2005; Table 11: Lending to individuals, Q1 2006-Q3 2008; Table 12: Household debt as a proportion of income, 1987-2007; Table 13: GFCI index of top financial centers, 2007-09; Table 14: Cost/income ratios of major UK banks, 2007-08; Table 15: Total advertising expenditure by UK banks, 2008; Table 16: Number of customers per retail branch, 2008; Table 17: The number of retail branches and customers by bank; Table 18: Revenue data for top 10 banks by market capitalization in April 2008; Table 19: Profit data for top 10 banks by market capitalization in April 2008; Table 20: Advertising expenditure, 2007 and 2008
List of Figures: Figure 1: The majority of respondents said that they plan to save more in the future; Figure 2: Most UK banks witnessed rising cost/income ratios between 2007 and 2008; Figure 3: With the exception of the Spanish banks, most banks saw profits decline or stagnate; Figure 4: Total lending experienced strong growth between 1992 and 2004; Figure 5: Household debt as a proportion of income fell away after the recession of the early 90s; Figure 6: The majority of consumers do not intend to use credit to fund their lifestyle; Figure 7: The majority of respondents said that they plan to save more in the future; Figure 8: The majority of respondents had saved more over the last six months; Figure 9: Banks and building societies rank among the most trusted financial institutions; Figure 10: Most UK banks witnessed rising cost/income ratios between 2007 and 2008; Figure 11: Total advertising expenditure by banks and advertising expenditure per customer, 2008; Figure 12: Citi uses texts to connect with customers based on their individually-defined criteria; Figure 13: HSBC's virtual forest saves the bank money and appeals to green customer sensibilities; Figure 14: BNZ offers tailored packages to its customers from a limited range of products; Figure 15: There is a wide range of customers per retail branch in UK banks, 2008; Figure 16: Most banks experienced a drop in revenue in the six months to June 2008 compared to June 2007; Figure 17: With the exception of the Spanish banks, most banks saw profits decline or stagnate; Figure 18: Advertising expenditure on savings products increased sharply in 2008; Figure 19: The style of HSBC's website is reflective of the overall economic situation in the UK; Figure 20: BNP Paribas has a variety of offers available to its customers; Figure 21: A large amount of the page is taken up advertising the current account; Figure 22: The Discover Motiva card has a number of special offers; Figure 23: BNP Paribas's section for young people could drive future revenue; Figure 24: Lloyds lists the extra features available with each value-added account type

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Weathering the Storm in UK Retail Banking

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