Terry Murden: Economies of scale mean small banks can’t win

SO WHAT do the names Aldermore, Shawbrook and Walton & Co mean to you? A firm of solicitors? Or a new advertising agency?

Actually, they are new entrants to the banking sector, the not-so-greedy champions of integrity, and so on, who are expected to help smash the high street domination of the big players.

But it is proving a tough task. Volumes remain low and market penetration in any meaningful way remains some way off. So why such slow progress?

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It emerged last week that Metro Bank, which has so far restricted its development to the London area, has provided just 100 mortgages in just over a year since it launched – and this after spending up to £2 million a time on each of its nine branches. With such high costs it needs to see a sharp increase in business. Metro insists it is pleased with progress and will break into profit by 2014 when it plans a flotation.

Aldermore, which specialises in invoice and asset finance and also provides commercial mortgages, hosted a reception in Edinburgh the other night to raise its profile ahead of a push into the east of Scotland. Its back-to-basics message is that it supports businesses through deposits and says it is attracting customers from the big four. But like Metro it faces the challenge of attracting depositors at a time of low interest rates.

The least well-known: Walton & Co and Home and Savings Bank are still seeking regulatory backing or sufficient support from investors.

Edinburgh-based Virgin Money and the acquisition vehicle NBNK depend on acquiring Northern Rock and the branch assets of Lloyds Bank. Without either they will have to re-examine their prospects. The former insists it can grow organically, but how? NBNK will be a mere shell without success in either auction.

Tesco Bank, also headquartered in Edinburgh, has struggled to make its in-store banks work and was supposed to roll out a new concept branch. It has also delayed the launch of its mortgages. The stark reality for the new banks is that this is not the ideal time to be trying to break the existing monopoly. The big players have the resources to freeze out their smaller rivals by offering the most competitive rates.

Amid all the hype about creating new banks, scale was an the issue that the proponents of a competitive high street seemed to overlook.

Add to that the uncertain economic climate, the still-weak appetite for mortgages, and it is difficult to see small banks providing any more than a peripheral or niche service, rather than breaking the mould.

Edinburgh Airport will fly off the shelf

BATTLE lines are being drawn in the bidding war about to be unleashed for Edinburgh Airport. BAA always expected a robust level of interest – a key factor in choosing to sell the capital’s airport over Glasgow’s – and even before the prospectus is published early next year a number of parties have made their interest known.

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Two consortia have lodged interest, one led by Carlyle Group and, as we reveal today, two infrastructure companies are also looking increasingly certain to submit offers.

This is good news for BAA which will have pencilled in a sale price of around £600 million but will be hoping that the rising number of bidders will push that closer to £1 billion.

However, it does negate the argument BAA presented during the Competition Commission inquiry that it should not be forced to sell as the climate was not favourable to a sale. Of course, it won’t be complaining if it gets more than it expected.

The plain truth is that assets such as this rarely become available and Edinburgh’s potential is substantial, based on 9 per cent passenger growth this year.

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