The two world rankers made huge profits as they increased their focus on corporate banking, opening a gap in the market for smaller, nimbler players to target Scotland’s SMEs
THE clearest sign of how far Scotland’s banks have come in the past decade occurred one week in March. The Royal Bank of Scotland, fresh from unveiling pre-tax profits of more than £9 billion, announced it had hired Citigroup’s former transactions head, Ellen Alemany, as chief executive of RBS America. In the same week it launched its private banking joint venture with Bank of China.
The moves seemed to cement chief executive, Sir Fred Goodwin’s, aspirations to transform RBS into a truly global player.
All the banks, including smaller Scottish-based players such as Clydesdale and Lloyds TSB Scotland, have been making massive profits in recent years on the back of low interest rates, low unemployment and benign market conditions. Profitability has soared as individuals and business customers have taken on ever-increasing amounts of debt.
While RBS is transforming itself into a global player in derivatives, and has made big inroads into general insurance through Direct Line and Churchill, HBOS has quietly been building a successful bancassurance franchise which entails selling long-term savings products to existing customers.
For years this was seen as the holy grail of banking and according to analysts, few can match HBOS’s success in the area. The downside is that its sales-driven culture has alienated many customers, who preferred the former Bank of Scotland’s former focus on service.
RBS is seen by analysts as having been less sure-footed than HBOS in extracting value from its branch network and is seen as having become too reliant on selling through lower-margin ‘direct channels’, such as Virgin One, First Active and Tesco.
Some analysts, including James Eden at Dresdner Kleinwort, believe that Royal Bank should do more to reinvigorate its core RBS and NatWest retail franchises.
As they have grown their balance sheets, RBS and HBOS have significantly upped their game in corporate and commercial banking, which could prove risky in the event of a downturn.
RBS, for example, is the second biggest arranger of loans to the private equity sector in Europe. However, its focus on big-ticket deals has meant less of a focus on serving small and medium-sized businesses in Scotland.
This has created an opportunity for the likes of Lloyds TSB Scotland and Clydesdale Bank. Manus Fullerton, director of corporate banking at Lloyds TSB Scotland, says that his bank has grown its share of corporate and business banking in Scotland from four per cent in 2000 to 11 per cent in 2006.
“Our smaller size means we can be more nimble in serving the needs of mid-sized customers,” he says.
For many years Clydesdale suffered the ignominy of being milked as a cash cow by its parent National Australia Bank. “Historically, they took advantage of the loyalty of their corporate customers while other business just melted away,” says one analyst.
However, under chief operating officer David Thorburn – current chairman of the CBI in Scotland – Clydesdale has reversed the flow and it now has about a 14 per cent market share.
The Aussie-owned bank is finally putting both its Yorkshire and Clydesdale arms onto a single back office system and has rolled out its integrated financial solutions centres across the UK – these grew loans and deposits by 30 per cent in 2006.
Top nine banks by number of employees in Scotland
1 HBOS 17,300
2 Royal Bank of Scotland Group 16,296
3 National Australia Group Europe* 5,500
4 HSBC Bank 2,000
5 Lloyds TSB Scotland 2,000
6 Abbey Scotland 1,800
7 Barclays Bank 1,400
8 Intelligent Finance 1,200
9 Standard Life Bank 712
*Includes subsidiary Clydesdale Bank
This article was published in Scottish Business Insider on 4 May 2007