Comment: Competition - a new threat to banking profits

'A new generation of powerful retail financial service groups, offering everything from banking to PEPs and motor insurance, will soon be at our doors'
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The Independent Online
It's bank bashing time again. The banks are once more enjoying record profits and with them comes a familiar chorus; if they are making so much money, they must also be seriously overcharging.

Banks are no longer quite the hated institutions they once were. Since the early days of the recession, when public outrage at the banks reached near hysteria, the big clearers have done much to clean up their act and introduce reasonable standards of service and accountability.

But essentially they are still an oligopoly - and when they announce earnings on the scale revealed yesterday by Barclays, they are reasonably charged with profiteering. In the past the excuse for such excess was that banks had to make hay in the good times so that they could store up capital for the bad.

If Martin Taylor, Barclays' chief executive is to be believed, however, the banking cycle has now largely been abolished. The quality of the loan book has been put ahead of its size and risk control systems have been improved in a way that should allow Barclays to float through the next recession without the calamitous bad debts of past cycles.

It is easy to dismiss such claims as little more than the youthful over- optimism of a chief exexcutive too wet behind the ears to know that, like the world itself, bank lending is an unpredictable business. If bad debts were anticipated, they wouldn't be made. But there is reason to believe that Mr Taylor is probably right, for quite apart from all the new fangled controls introduced to prevent the mistakes of the past, it is hard to see where the next banking fiasco is going to come from - unless it is an all too possible proprietory trading loss on the investment banking side of the group. On conventional clearing bank activities there should be no repeat of the indiscriminate property and small business lending that characterised the top of the last boom.

All the more reason, then, for believing the banks are now profiting at the public's expense. If there is to be no profits downturn of any significance, the old justification for bumper profits, that they need to be stored away for the bad times, shrinks away. The evidence is in the dividend - up by 21 per cent - and a third share buy-back, this time for pounds 460m worth of stock. Mr Taylor would rather give his excess capital back to shareholders than risk it in past fashion on a glorious lending binge.

An analysis of the figures also seems to support the case for the prosecution. The main boost to profit comes not from reduced bad debt provisions, or from cost-cutting, but from net interest income, fees and commissions. At a time when business is stagnating, profits are rising strongly. Barclays attributes the increase to "improved products and enhanced customer service". It would, wouldn't it. The other possibility is the age-old one - that if you cannot make the profits rise by growing the business, you do it by crunching the customer.

It would be a shame, however, if all this talk of profiteering were to give rise to fresh demands for windfall profit taxes. High Street banking is still largely a monopoly of the few. But the world is changing, or customers must hope that it is. Building societies are making themselves into banks and a new generation of powerful retail financial service groups, offering everything from banking to PEPs and motor insurance, will soon be at our doors.

This is where the main danger to banking profit comes from - not from a sudden-death legacy of past lending decisions, but from the slow march of real competition. Eradicating the banking cycle is only a small part of Mr Taylor's job. The main one is to prepare Barclays for the fiercely competitive world to come.

Time to show Ken the yellow card

Those were the days. In September 1994 the target measure of inflation was at its trough of 2 per cent. The Bank of England's favourite measure, excluding indirect taxes as well as mortgage interest, was 1.4 per cent. And Eddie George recommended a half point increase in the level of base rates. What's more, Kenneth Clarke took his advice. The reason was that output was growing rapidly. Even though there was spare capacity in industry, growth passed the speed limit, so Ken and Eddie acted pre-emptively to prevent a future increase in the rate of inflation.

The Bank is expected to repeat today the warning that the Government risks inflation being above target in 1998. But it is obviously in a more difficult position than in 1994 for it has comprehensively lost the PR battle with the Chancellor. Since his gamble last May, when he first ignored Mr George's interest rate advice, Mr Clarke has won almost everyone over to his view that the Bank is always too gloomy about inflation and there is really nothing to worry about. As a matter of fact, the Bank's record in forecasting inflation is no worse than the average. It is in the nature of economic forecasts that they overpredict inflation when it is falling, underpredict it on the way up and invariably miss the turning point.

The Clarke propaganda aside, there will be a time in the next six months when the Bank of England will have to spell out the need for a rise in base rates. Almost every forward-looking indicator of economic activity is pointing to growth above the 3-3.5 per cent inflationary limit. Several measures - growth in house prices, increase in purchasing power - have returned to their highest or fastest since the late 1980s. At the same time, economists think that the inflation rate could fall further during the next few months. So history repeats itself and we have autumn 1994 all over again. If Mr George senses he will have to show Mr Clarke the red card as the election approaches, he should be fishing out the yellow card in today's report. The "inflation is dead" school might mock, but it is not the job of a central banker to make optimistic assumptions that the economy is different this time around.

A man who means what he says

Ronnie Frost, the chairman of Hays, is that increasingly rare commodity in business: someone who says what he means, means what he says and does what he says. Two weeks ago he said he would only proceed with a bid for Christian Salevesen if he had the support of its board, or at least part of its large family shareholding. He also said that whatever transpired, he would not overpay. How many times have we heard bidders pledge that before only to be egged on by their fee-hungry advisers.

It takes nerve to track a company for two years, decide it is a perfect fit and then walk away when the price is too high. Mr Frost did that yesterday and it is Salvesen's family shareholders who may live to rue the decision. Hays still has its own expansion strategy in place, built on organic growth and carefully targeted acquisitions of privately owned transport businesses elsewhere in Europe. Salvesen, by contrast, will have to work miracles to match the shareholder value that was on offer from Hays.