The Wendy Chowne Column: U-turns & change in the markets

10 November, 2014

The fluctuating markets have driven some interesting U-turns this month and change seems to be a constant theme, with several reports directing attention to the impact that stakeholders and business environment can have on institutional strategy.

Aldermore in September had announced plans to float on the stock exchange. Aldermore is viewed as a challenger or alternative bank, founded in the middle of the credit crunch in 2009 and raising deposits from retail and SME customers to lend to homeowners and SMEs. It has no branches but offers its products and services through online or phone delivery channels as well as its 12 regional offices. Its website states that it has ‘core values of being reliable, expert, straightforward and dynamic.’ Reuters confirmed that Aldermore hoped to raise about £75m through a valuation up to £800m, with some declaring it could go as high as £900m. The proposed listing was seen as a significant event for new challenger banks, with Virgin Money set to follow the precedent and float later in the month. By October 15 and with two days before the flotation, Aldermore decided not to proceed ‘due to the recent deterioration of global equity markets’. By October 17 Virgin Money’s CEO Jayne-Anne Gadhia had advised that they too had decided to delay their flotation until ‘market conditions allow’.

Lloyds announced 9,000 job losses over the next 3 years, most of which they hope will be through ‘natural wastage’. The underlying rationale is that digitisation has reduced the need for so many branches and, in consequence, 200 are no longer needed; however this is partially offset through the opening of a further 50. This raises two separate but inter-linked points: (i) has digitisation really impacted so significantly and (ii) what is the current position of the ‘last branch in town’ policy? This was a voluntary pledge whereby some banks recognised the adverse impact on local communities where no bank branch is present at all. Lloyds had stated that, where they were the last bank on a particular high street, they would not close. This has now been withdrawn. 

TSB’s Peter Pester acknowledged that, whilst some TSB branches may have to ‘merge’, he intends to buck the trend of closing branches and instead open 30 new branches. This resonates well with the Campaign for Community Banking Services (CBBS) who are concerned at the trend. They reveal that, by September 2014, 331 bank branches had closed in the UK compared to 195 branches in the whole of 2013. They point out that branch closures have a wider, negative impact: reduced access to financial services, particularly for small businesses and the elderly, socially excluding low-income consumers from mainstream financial services (financial exclusion), and a commercial decline of communities caused by the absence of a community-based presence.

Earlier this year the British Bankers’ Association (BBA) published a report stating that millions of people in the UK are using technology to effect £6.4bn of transactions each week, an increase of nearly £1bn from the previous year. Coupled with this is the recognition of a decrease in customer footfall at the major banks of around 30%. They point out that new technology such as contactless cards, mobile banking, banking apps etc are allowing customers unprecedented access opportunities. This view would seem to be supported with the inclusion of Skype technology for deaf customers and earphone points in ATMs to enable access for the visually impaired (RBS). So customer-friendly banking technologies would seem to be an appropriate response to customer demand and the FCA Thematic Review into Mobile Banking and Payments, published last month, considers and determines how firms achieve good consumer outcomes. However whether digitisation should be just another delivery channel rather than replace branches remains a cause for concern for many.

Passing the stress test: 25 out of 130 banks failed the ECB Banking Health Check and some failed the new part of the Health Check, being the Asset Quality Review (AQR). This audited the quality of a bank’s assets as at December 2013 and it is acknowledged that some lenders have addressed capital shortfalls since then. The AQR concentrated its survey on 123 big banks in 22 countries and RBS, Lloyds, Barclays and HSBC passed; indeed no UK banks failed. The Treasury Economic Secretary, Andrea Leadsom, was reported as stating that this demonstrated that ‘our robust reforms to build a more resilient banking sector are working.’ Although it should be noted that the Bank of England stress test results are expected soon and the general perception is that these are tougher than the ECB version.