Challenging Times for Challenger Banks

When I started in Building Societies in 1979 the conventional view at the time was there were far too many banks and building societies whose activities were artificially separated with significant waste caused by serial and duplicated head office, back and middle office and board structures.

When I started in Building Societies in 1979 the conventional view at the time was there were far too many banks and building societies whose activities were artificially separated with significant waste caused by serial and duplicated head office, back and middle office and board structures.

Often boards were staffed by local business worthies, al la the Spanish Cajas which are heavily implicated in Spain's debt woes. Unfortunately the butcher, the baker and candlestick maker can bring life wisdom but sometimes at the cost of self interested interference. They cannot bring relevant expertise, a precious and all too rare commodity on bank boards in recent times.

If we have learnt anything from the financial crisis a significant proportion of bank boards need to be populated by those who understand banking, and can bring constructive challenge to bear on strategy and performance.

Most of the 'mutual' organisations who fell away in the 80’s and 90’s were run on a friendly society basis but could not keep up with the costs associated with modern compliance, technology investment demands and competition from one stop shops; as universal banks and the few large building societies remaining have become.

Competition will invariably drive consolidation unless a real competitive differentiator can be found which is sustainable and difficult to copy.

Contrast how few car manufacturers, supermarket chains and global retail brands there are. Even something as modern as digital has quickly become dominated by Microsoft, Google, Yahoo and Apple.

Thus the EU driven spin off of the Lloyds TSB branch network of 632 branches looks rather more hopeful than inspired, and particularly damaging to the taxpayer as it is sold off at a near 50% discount to the original £1.5bn price tag. Of course the Co Op is a serious bank and I am sure will run the new network well, with no new Head Office infrastructure needed.

But if there are no synergies and cost savings where will the enhanced competition and customer value come from. Just saying we have a more diversified ownership structure will not in and of itself drive increased competition because no new players have come into the market.

If the Co Op could soak up unfulfilled lending demand it would probably have done that already.

This sale seems to be more about keeping the EU happy, politicians being seen to take action, and shuffling deckchairs.

The reality is high street banking is not especially profitable, has a high cost of delivery and will struggle to deliver above 5-6% ROE. Thus scale is important as central costs are diluted across bigger platforms.

Carving banking up mechanically and hoping by some kind of unseen alchemy it will improve is at best hopeful and at worst misguided.

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