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shareholder returns without increasing risk,’
says Robin Savage, banking analyst at broker
Cannacord Genuity.
Both regulation and legislation are
affecting banks’ activities. Regulation is
discouraging them from participating in
risky but sometimes rewarding markets,
while legislation has given
birth to the bank levy, an
expensive tax which is so
disliked by the banks that
it has prompted HSBC
to threaten to move its
HQ away from London
altogether. It will announce
its decision later this year.
‘The new environment
makes it harder for high
street clearing banks to
deliver growth.The problem is balance sheet
growth. Underlying profits are improving but
that is down to cost-cutting and a benign bad
debt environment,’ says Ian Gordon, banking
analyst at investment bank Investec.
‘Before the crisis, banks were generating
a return on equity of more than 20%. Now
returns are in single digits and I don’t believe
any of them will reach double-digit returns
until 2018.’
To some extent, stricter regulation and low
growth are two sides of the same coin, both
suggesting that the returns of yesteryear are
unlikely to be repeated.Yet banks still need to
find the money to cope with
another very real challenge
– outdated IT systems.
‘A lot of banks’ systems
are old and complex, and
are out of sync with the way
young people, who have
grown up with technology,
live their lives,’ says Davies.
This technology gap
has created an opening for
so-called challenger banks,
including Shawbrook andAldermore, which
floated on the stock market earlier this year.
Much has been made of the threat they
pose to the established banks. Shares in both
have risen since they floated
1.
‘Both enjoy
much lower costs than their larger rivals; they
have no legacy fines or outdated IT and their
returns are substantially higher,’ says Gordon.
‘The challenger banks are focused on
various niches where they can provide
superior service and product, while
delivering impressive returns to shareholders
and growing their market shares,’ adds Savage.
TSB was perceived to be so attractive that
it was only listed on the stock market for nine
months before being snapped up by Spanish
bank Sabadell.
‘Challenger banks are interesting.Yes, they
are niche players but their cost/income ratios
are better than the established players and
their returns on equity are better,’ says David
Sayer, global head of banking at KPMG.
Some, such asVirgin Money and Metro
Bank, focus on providing consumers with
better service. Swedish Handelsbanken,
one of the fastest-growing banks in Europe,
focuses on providing SMEs with the kind of
service that old-fashioned bank managers
used to give 30 or 40 years ago, with
local branches and staff entrenched in the
community. Shawbrook andAldermore, by
contrast, have no branches at all.
‘Challenger banks have attractive business
models with simple cost structures, no
legacy issues and an ability to cherry-pick the
markets they want to be in,’ says Gordon.
However, established banks have one key
advantage – their large customer base.
‘Most people distrust banks but they are
reasonably happy with their own branch. If
banks can use that loyalty and build on it by
investing in IT, offering simpler products
and improving efficiency, they can improve
customer service and reduce costs.Then they
should be able to flourish,’ says Sayer.
There is a long way to go but the high
street banks have already started to make
progress. If they continue on the right path
they may yet deliver long-term gains for
shareholders. In the meantime, the challenger
banks snapping at their heels should
encourage competition, benefiting both
customers and investors.
1
This technology
gap has created an
opening for so-
called challenger
banks
THE INVESTOR
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Balance sheet
The banking sector is slowly
rejuvenating after the financial crash of 2008, but
new banking models are now lining up to challenge
established high street players.
ANALYSIS
BANKING
