Weathering the Storm in UK Retail Banking

Published by: Datamonitor

Published: Jun. 10, 2009 - 13 Pages

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

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

Abstract

• 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.

• 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.

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