Development of the UK Retail Banking Landscape

Strategic Perspectives on Banking

GBRW Director, Michael Pearson, shares his thoughts on some key strategic issues in banking. He considers topics such as the long term trends in both developed and emerging markets, and the role of technology in developing innovative new products and channels.

Long Term Success in Banking - Lessons from the UK

There is a general perception that retail banking is dominated by a small number of large banks and that change in retail banking, and banking in general, is relatively slow. Incumbent players have some distinct advantages and are difficult to dislodge. However, it is also clear from history, that over longer time periods of 10 or more years, change is quite significant and survival is a challenge.

If you take the example of the UK, only 2 of the banks and building societies that were in the top 10 in 1990 based on total assets (see table) were still around and fully independent in 2010 – Barclays and Standard Chartered. There are several reasons for banks failing to survive over a longer period so it can be difficult to draw general conclusions.

Major Banks and Building Societies in the UK in 1990
Asset Rank Bank or Building Society
1 Barclays Bank
2 National Westminster Bank
3 Midland Bank
4 Lloyds Bank
5 Abbey National
6 Halifax
7 Royal Bank of Scotland
8 TSB Group
9 Standard Chartered
10 Bank of Scotland

One of the biggest retail banks in 1990 was National Westminster. The bank was taken over by Royal Bank of Scotland and the NatWest brand was retained on the high street in England. At the time of the takeover, the management of RBS was seen to be superior, more aggressive, and more innovative. In fact, RBS was not well managed and eventually paid the price for over-expansion and only survived the financial crisis after being bailed out by the UK government.

Midland Bank was the next largest retail bank in 1990 to be taken over. Midland had been the largest bank in the world at one time in its history, but a series of damaging overseas mistakes left it relatively weak. Eventually it succumbed to a takeover by HSBC which was looking to diversify away from its base in Hong Kong. Midland provided HSBC with a core operation in the UK, and HSBC moved its global headquarters to London.

The large building societies in 1990 were faced with some big strategic choices. The two largest became banks and went public – Abbey National and Halifax. Neither was successful in the long run, for different reasons, and eventually both were acquired by stronger banks. Abbey was first of all damaged by problems in its treasury and trading, and was acquired by Santander from Spain. Halifax merged with Bank of Scotland to form HBOS, and expanded rapidly in commercial lending and in Ireland which led to the collapse of the bank in the financial crisis. HBOS was then taken over by Lloyds TSB.

Of the larger building societies, only Nationwide remained as a mutual and this strategy has proved to be successful. The company acquired several smaller societies and has remained independent. It was not one of the top 10 retail banks or building societies in the UK in 1990, but it is now.

Next on the list is Lloyds Bank which is more of a mixed story. After successfully merging with TSB in the 1990’s, the bank was in a position to survive the financial crisis but made the fatal mistake of acquiring HBOS. The result of that transaction was the combined group needed a capital injection from the UK government, although to a lesser extent than RBS.

For all its faults, you have to applaud the fact that Barclays has survived and has transformed itself both in terms of business and geography. The total assets of Barclays have increased by a multiple of 8 since 1990. Standard Chartered has also had its ups and downs (and is currently on a bit of a down), but has remained independent and has expanded in emerging markets. The bank has no retail banking in its home market of the UK so is a bit of an oddity.

The reasons for failure have therefore ranged from poor diversification decisions (both business and geography), over expansion and mismanagement of credit risk, and blow ups in trading and treasury. It is easy to see these problems with hindsight but the question for each bank at the time it embarked on a particular strategy is what were the options? Was doing nothing different an option? Was it a case of good strategy and poor execution? It seems like the problems are not due to an overall industry disruption, but are more to do with strategic choices and management.