THE consensus on banking is that we need more competition. Hence the move to encourage new entrants and force the creation of others through asset disposals. But is it possible that we have too many banks?
It has to be said that the notion that big is beautiful has been discredited by what happened in 2007-9 and there are those who said Royal Bank of Scotland was becoming too large to manage. That depends to an extent on who is doing the managing and how they are doing it. Some of RBS’s larger peers escaped the financial crisis and continue to thrive.
Artificially creating competition is fraught with difficulties, as evidenced by the Co-op’s decision last week to withdraw from the deal to acquire 632 branches of Lloyds TSB and its associated businesses. This followed the collapse last October of Santander’s agreement to buy 316 branches from RBS.
Each of these auctions was forced by the European Commission as a condition for receiving bail-out funds, but there was hardly a rush of buyers. National Australia Bank pulled out of bidding for the RBS assets and is constantly reviewing its commitment to the UK. Private equity has sniffed around, but the Treasury would be cautious about selling to a non-banking institution. Is the lack of interest a result of there being too much banking activity already?
What about the “new entrants”? Virgin Money bought the Northern Rock business, but Virgin was already a player in financial services. The launch of M&S Bank last year was more of a relaunch of M&S Money and, in any case, it is propped up by HSBC. Tesco Bank has moved into mortgages but is yet to launch a current account so it can really call itself a bank.
The collapse of the Co-op deal means that Lloyds will now press ahead with floating the so-called Project Verde business under the old TSB brand. But, as one analyst pointed out, any investor expecting an instant profit will probably be disappointed, as Lloyds will be expected to price the shares so the taxpayer is not short-changed. In that case, there will be no rush of buyers.
That’s not to say the TSB will be a minnow in the sector. Its branches will have 4.8 million customers, including 3.1 million personal current account customers, or 7 per cent of the personal current account market.
But can it survive as an independent? After all, it was intended that this business would be absorbed into the Co-op, whose bank would have tripled in size. The City was pleased that the Co-op deal failed, as it would have required recapitalising.
The TSB’s main defence in remaining out of the clutches of a predator is that the political climate would force a competition inquiry, at which point any bid would be killed off. That, however, may be another dampener on the shares, unless TSB conjures up a secret recipe for growth. In other words, it becomes even bigger.
Bank stocks are hardly too popular just now, and if investors are likely to be cool on TSB, their appetite will be further tested if RBS floats its branches under the revived Williams & Glyn’s banner. A decision may be made this week.
Aside from asset disposals, there was talk last week of splitting RBS into a good bank and a bad bank. This would be similar to the Northern Rock model whereby the toxic assets would be warehoused in a state institution and the good bank would be liberated to start growing again. In other words, allow RBS to begin recolonising its marketplace.
Of course, while wanting more competition we also want the big banks to return to profit. How? By selling more products, of course. So the big banks will continue to grow and the small banks will need to become bigger banks (maybe through consolidation) in order to provide competitively priced products.
It’s worth noting that while critics call for more competition, the experience overseas suggests the big bank model still works. Australia and Canada are each dominated by four banks, all well capitalised and regulated. The UK has five and wants more.
And don’t forget that it was many of the small banks – here and overseas – that failed. The US has shut down scores of tiny banks, Spain had to rescue the provincial banks, or cajas. At home, Bradford & Bingley was a casualty.
One concern about this rush to penalise the UK banks is that they will be left vulnerable to predators in countries where no such restraint is being imposed.
What price RBS and Lloyds being in foreign ownership in five years’ time?