Never one to shy away from knocking (and occasionally praising) the big banks, Ian Gordon, Investec’s banking analyst, has come up with a really sound tome on the industry.
In “UK Retail Banking: Old, New, Borrowed and Blue”, Gordon says he believes the sector is already “in rude health”. He goes on: “The incumbent banks are seeing little pressure on back-book margins, are able to grow mortgage assets (where they actually choose to do so), costs are (gradually) falling, and impairments have declined sharply to sub-‘normal’ levels.”
That’s a happy recipe and one which can only get better as the broader economy moves into solid growth over the next couple of years. Gordon focuses on the changes in the mortgage market over the past three years including the influence of the Government’s Funding for Lending scheme.
He shows that the so-called challenger banks have more than doubled their share of the gross mortgage market (which itself is back in growth) from £24.7 billion in 2011 to £50.8 billion in 2013. In terms of market share that is from 17.5% to 28.8%.
That is quite staggering growth. It is driven in part by some of the big six banks deciding to reduce their mortgage books after something of a splurge post the financial crisis. But it is also driven by people looking for something different, be they supermarket customers prepared to buy their home loan with their baked beans, or dog lovers tempted in by tasty treats for their mutts.
What is fascinating in Gordon’s analysis of the challenger banks is the relative strength of most of them — with the notable exceptions of Co-op and Clydesdale. Tesco and Sainsbury’s, since they each took full control of their banks, have driven down costs and driven up revenues, with the former poised to launch a current account shortly. Virgin Money, as last week’s figures showed, has been transformed by its takeover of Northern Rock. TSB and Williams & Glyn’s look increasingly attractive as they draw away from their parents Lloyds and RBS.
It may just be, as Gordon suggests, that come the next Government there will be no need to use the sledgehammer of the law to create new challenger banks. They are already here.
