Copyright: David Lawson 2001
‘Banks sell a range of products into a range of markets. Historically no-one was sure which product was the main one - loans, money transmission, custody etc - because they were delivered as a package. Customers are now much more likely to choose among competing banks than they were, especially for things like loans and cards, so the individual products have to make sense as standalone profit centres.’
The Chartered Institute of Banking is the closest professionals come to their own talking shop but most of the sector’s 300,000 staff look to the trade union UNIFI for leadership. Employers have the British Bankers’ Association, representing around 300 UK and overseas groups, and it has been a loud voice in recent years as they have been assailed by government and consumers over issues such as branch closures and lending to small businesses.
‘But it’s tough to find common ground when you deal with people ranging from little old ladies to sophisticated derivative managers in global conglomerates,’ said one senior banker. Change is also difficult to grasp when it is happening at different rates, in different ways and at different times, depending on their country and structure. ‘Anyone working for a property lending bank will be seeing strains and difficulties in their own business, but they are likely to be different problems than faced by their competitor next door,’ says Hersom. ‘All are driven by increasing regulation and strong pressure for consolidation, so the underlying causes are the same but the symptoms will differ.’
Mergers have had the most obvious impact. More than 2000 branches have been closed across the UK in a struggle to cut costs. Job security – once the bedrock of a career in banking – has waned. ‘While overall employment has grown, specific institutions have experienced great decline,’ says a report by UNIFI Research. The Lloyds TSB merger, for instance, slashed 16,000 jobs since 1995.
US banks led the charge into consolidation. When The Banker magazine first classified global banks 30 years ago, BankAmerica and First National City topped the list. They remain there, although FNC (now Citigroup) has stolen top spot through mergers which increased the asset base 26-fold to $668bn. The impact on the UK has been both obvious and subtle. Broadgate, the pioneering office development over Liverpool Street Station, was derided as ‘too remote’ when first proposed. But the banks could find nowhere else to settle after the City was transformed by deregulation – the Big Bang – in the late Eighties. Canary Wharf Wharf would not exist but for firms like Morgan Stanley swarmed in to gobble up almost all the traditional City names. They provided the original funding and are now expanding into much of the remaining space.
The West End and City are not immune, with an inexorable shift towards bigger buildings. ‘A decade ago a typical dealing floor would be around 930 sq metres (10,000 sq ft); now the largest requirements typically require in excess of 4,645 sq metres (50000 sq ft),’ says DTZ Research. This has extended prime locations as far as fringes like Victoria and now Paddington, and driven amalgamation of sites in core areas.
On the other side of the coin, older space is being thrown back on the market. DTZ estimates that 120,000 sq metres (1.3m sq ft) will be added to central London’s supply by mergers and acquisitions over the next three or four years. NatWest has large amounts of space Hersom’s RBS will need to rationalise. In the longer term, Deutsche Bank which occupies 150,000 sq metres (1.6m sq ft) will need to address the overlap with the space it has acquired by the takeover of Bankers Trust. Others in the wings include Dresdner, which acquired Kleinwort Benson, and the recently amalgamated Bank of America and Nationsbank. DTZ says the impact of this mega-merger could stretch beyond central London, with backoffice space in Bromley and Croydon under the magnifying glass.
The urge to merge is easing among the US giants, however. ‘Consolidation will continue but the pace of change is likely to be less frenetic,’ says a study, ironically by one of the biggest consolidators, Citibank. Shareholders are disenchanted by the failure of mergers to achieve the spectacular savings promised. Even where costs have been slashed, earnings are no longer expected to grow as much as expected.
The spotlight will switch to European banks. Banque Nationale has already been though a traumatic merger with Paribas. UBS has grabbed the reins at fellow Swiss institution SBC, which had already gobbled up the venerable British bank Warburg. The UK clearers have fought to stay in the big league. Barclays’ acquisition of The Woolwich is the latest in a string of mergers including HSBC/Midland, Lloyds/TSB and RBS/NatWest. Meanwhile sturdy old mutuals like the Abbey and Halifax have transformed into full banks.
Euro supporters now anticipate cross-border moves similar to the expansion of US banks overseas. But this is dismissed by Emilio Botin, co-chairman of Banco Santander Central Hispano – itself the result of several mergers. He points out that investors have absorbed the fact that while there were tie-ups worth $5000bn in 1998-99 alone, only half the merged companies have outperformed their competitors. Mergers within Europe are also fraught with dangers of cultural and legal differences. ‘It will be a long time before sufficient convergence occurs to overcome many of these obstacles,’ he says. Globalisation through strategic alliances will be the norm until then.
But where does this leave the mythical ‘average banker’? The pressures and challenges depend on the employer, says Hersom. The big clearing banks, for instance, are all heavily focussed on reducing costs and finding new markets. Each of the main players has gone about its business in a different way. ‘The very size of the business makes the “one size fits all” route impossible,’ he says.
Foreign banks are taking advantage of the other big banking challenge, the Internet, to have a ‘virtual’ rather than a real presence in the UK. The number of offices fell by 20 in the year to May, according to Noel de Berry of consultants Noel Alexander. But they remain big employers – and property lenders - with a balance of almost 520 offices. ‘The German banks which have poured so much money into property have their own problems,’ says Hersom. This includes a overcrowded and troubled domestic market requiring a substantial consolidation and restructuring. ‘They have very focussed units in London, but all suffer from confused messages from home.’
Former building societies have brought new blood to the same retail jungle as the clearers. Their challenge is to find extra business to ameliorate the burden of having to pay shareholders. The remaining societies are fighting on two fronts – to protect their business and their mutual status. Commercial property finance has become a profitable new market.
Bricks and mortar are also playing a more direct role. Abbey has just farmed out all its 6.5m sq ft of property in a PFI-style outsourcing to Mapeley, the consortium backed by George Soros, in a bid to improve its margins. The bank is also thinking laterally by introducing Cost Coffee bars into branches as an extra income source. It is debateable whether this will spread, however. JP Morgan was a prime candidate for outsourcing but failed to find a partner. Lloyds went through a burst of sale-and-leasebacks of branches a couple of years ago but has rejected a mass PFI. nventional premises like call centres away from prime centres and cross-selling via telephone and desktop PC. Others see less certainty, however.
‘Many large UK incumbents are set on bancassurance ….but cross-selling will mostly fail for the same reasons they have in the past: few consumers believe that a single provider will offer the best rate for every product,’ says Fletcher Research. Tim Sweeney, director-general of the British Bankers’ Association, is under no illusions. ‘Banks will face extinction if they fail to evolve a competitive response,’ he said. ‘With the arrival of new technology and a new generation of morecritical customers, old relationships will stretch to breaking point.’
Property lending is already reflecting this. ‘Some 30% of mortgage applications are now transfers. This is mature competition in action,’ he says. ‘It no longer matters if you call yourself a bank: the survivors will be the players who apply new technologies in ways that people find most useful, and who foresee the changes in customer need.’ Interesting times indeed.