2.1 Banking: competition and the ‘challenger’ banks
The commercial banks provide financial services to both personal and corporate customers. Their activities are not limited to what may be viewed as conventional banking services – providing current account services, commonly online, and offering loans and overdrafts to their customers. Additionally, banks provide credit cards, offer mortgages to home buyers and provide insurance services too.
Table 1 shows the largest of the commercial banks operating in the UK and their asset sizes, as at September 2015. There are several other banks operating in the UK – for example, Sainsbury’s Bank and Tesco Bank – but these are much smaller in size than those listed.
Table 1 Commercial banks
|Market capitalisation September 2015||Asset size December 2014|
|Royal Bank of Scotland||£22bn||£1051bn|
|Lloyds Banking Group||£54bn||£855bn|
|Standard Chartered Bank||£18bn||£465bn|
|Banco Sabadell (TSB)||£7bn||£27bn|
In considering how the banks conduct their business, it is important to remember their ownership status: they are, in most cases, public limited companies (plc’s) and are owned by their shareholders. A key objective for any plc is to aim to maximise value for its shareholders. The higher the level of profits, the greater the capacity to pay dividends to the shareholders – and/or for the share price of the bank to rise to reflect the growth in the value of the business.
The market for core financial services – such as banking, mortgage and savings products – is viewed as being less competitive than it was in the last century. A small number of banks have very large shares of the banking markets and hence have considerable ability to manage the profit margins at the expense of consumers. In the years after the 2007/08 financial crisis, HSBC, Barclays, Lloyds and RBS accounted for around 75 per cent of the personal current account market in the UK and close to 85 per cent of the small business market.
Recently, though, there have been new entrants into the UK banking sector. In 2009 Sir Richard Branson announced plans to extend the Virgin Money UK business to banking status, either by obtaining its banking licence from the FSA or by acquiring an existing bank (The Times, 2009a). In January 2010, this plan crystallised with the announcement of Virgin Money UK’s acquisition of the small bank Church House Trust. This move into banking by Virgin Money UK was extended in January 2012 with the acquisition of Northern Rock bank from the government for £747m. Virgin Money UK wasted no time in disposing of the tarnished Northern Rock brand.
Metro Bank has been a further new entrant becoming, in July 2009, the first new bank with a high-street network in the UK for more than 100 years. Recent years have also seen the emergence of Aldermore Bank in May 2009 and Shawbrook Bank in October 2011 – although neither has a branch network. Further new entrants are expected in the coming years to join these new so-called ‘challenger’ banks.
To generate further competition in the industry, the government announced a series of measures in 2009 – prompted by pressure from the European Commission – to scale back the market power of Lloyds Banking Group and the Royal Bank of Scotland (RBS).
Under these plans, Lloyds and RBS were required to create one new bank each from their existing operations, which then have to be sold to create more competition in the UK banking market. Additionally, RBS was also required to sell off its insurance operations in addition to certain retail and investment banking operations.
In July 2012, a sale of 631 Lloyds Banking Group branches to the Co-operative Group was announced. However this deal was aborted in April 2013 when the Co-operative Group found that its banking arm (Co-operative Bank) had a ‘black hole’ in its finances, arising from the loan losses on the portfolio of assets it had acquired when it merged with the Britannia Building Society in 2009. Subsequently the Co-operative Bank has had to embark on a plan to cede 70 per cent of the ownership – and, by implication, control – of its business to its bondholders. These include the US fund management companies Aurelius Capital Management and Silver Point Capital.
Subsequently, Lloyds met the requirement to reduce its branch network by splitting itself into two banks – Lloyds and TSB – in September. For the time being, TSB remained part of Lloyds Banking Group until it was fully disposed of through a share offering in May 2014 that saw it separately listed on the London Stock Exchange. Then, in 2015, TSB was acquired by the Spanish challenger banking group Sabadell.
By 2013, Lloyds Banking Group had made a strong recovery from the financial crisis and, with the consequent rise in its share price, the Government was able to sell a 6 per cent shareholding in the bank for £3.2 billion, generating a profit of £61 million in the process. A further reduction in the government’s shareholdings occurred in 2014 and 2015, with the result that by August 2015 its stake in Lloyds was down to 13 per cent. In October 2015 the government announced plans to sell off its residual stake in early 2016.
RBS is meeting its requirement to create a new bank by 2017 by re-establishing Williams & Glyn bank. This spin-off challenger bank is rekindling the name of the bank that was absorbed into RBS back in 1985.
To facilitate greater competition the Independent Commission on Banking (ICB) also called for the charges and costs of current accounts to be made entirely clear and for the switching of accounts to be made easier and quicker. The commission also called for the new financial services watchdog – the Financial Conduct Authority (FCA) – to have a clear brief to promote effective competition in the UK banking industry. The Competition and Markets Agency (CMA) is currently investigating the competitiveness of the banking industry in the UK – specifically the competitiveness of services for retail customers. The CMA’s final report on this issue is scheduled for publication by August 2016.