Jeremy Warner's Outlook: HBOS resists membership of top banking club

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The Independent Online

Profits at HBOS may finally have eclipsed those of Lloyds TSB, but please don't think of the former Halifax building society as part of the Big Four, banking club, insists the chief executive James Crosby.

Profits at HBOS may finally have eclipsed those of Lloyds TSB, but please don't think of the former Halifax building society as part of the Big Four, banking club, insists the chief executive James Crosby. Rather, HBOS is the unwanted interloper at the table, come to spoil the party for the traditional clearers. Why, Mr Crosby is even happy to be aligned with Don Cruickshank, the former telecoms regulator who has had the Big Four foaming at the mouth in suggesting that the payments system needs more competition and a regulator to ensure swifter clearance.

In making this argument, Mr Crosby has to face both ways, for in addressing his City audience he's as keen to highlight the spoils of war - a 22 per cent in pre-tax profits to £4.6bn, a planned £750m share buy-back, an 8 per cent increase in the final dividend and the promise that in future dividends will rise in line with earnings - as his self-proclaimed role as consumer champion. Nonetheless, on the evidence of yesterday's figures the strategy seems to be working just as it was supposed to.

By targeting the soft underbelly of the Big Four banks on current accounts, SME lending, credit cards and other forms of unsecured lending, HBOS is showing spectacular levels of growth, both in revenues and, perhaps more strikingly, in profits too. While the others are at best stagnating in UK retail banking, forcing them to rely instead on their capital markets and overseas operations for the bulk of their profits growth, HBOS, an almost wholly UK-based business, is storming ahead.

For how much longer can Mr Crosby hope to keep it up? Quite a bit longer yet, he reckons, pointing to the fact that the Big Four still account for 80 per cent of SME lending and some 70-80 per cent of basic banking products, from current accounts to unsecured lending. The Big Four dismiss his efforts as more marketing hype than genuine price competition, but there's no doubt it's having its effect. The level of current account switching has doubled over the past year, and HBOS has taken the lion's share of the switches. Across a wide range of banking, insurance and savings products, HBOS reckons it has the opportunity to advance its market share from the low to the high teens.

Mr Crosby's position is best summarised as let's have more competition in banking by all means, but not too much, for HBOS is more than happy with its present status as the only serious alternative to the Big Four. Whether Abbey National, now under new management and ownership, is capable of rivalling HBOS for this market remains to be seen, though on the evidence of Banco Santander's charges in Spain, it doesn't look likely.

Mr Crosby may not yet be part of the club, but on the present rate of progress he soon will be. What he does for an encore is anyone's guess.

BBC compromise

So the licence fee is safe for another 10 years. Or is it? Proposals for the future of the BBC announced yesterday by the Culture Secretary, Tessa Jowell, represent a reasonably sensible compromise between the demands of the reformers and supporters of the status quo.

One way of describing it would be a fudge. The proposed trust to oversee the corporation is plainly an advance on the BBC's board of governors, who can never make up their minds whether they are regulating or running the BBC. But it falls a long way short of the Burns Report recommendation of a Public Service Broadcasting Commission, while the idea that the licence fee should be shared among rival broadcasters to fund public service broadcasting obligations has been junked altogether.

This is very much to be welcomed, for it has always seemed an extraordinarily bad idea. The BBC is undoubtedly a leviathan, but deprived of the full sustenance of the licence fee, it would lose critical mass and end up as no use to man or beast. Spread thinly across the broadcasting arena as a whole, the licence fee would become just another form of state subsidy, a charter for bureaucratic interference and pork barrel politics.

Yet by ordering the BBC to cease chasing the ratings and confining its activities to public interest programming, Ms Jowell has in the long term signed the corporation's death warrant. The licence fee has been reprieved for the next 10 years, but it seems unlikely the stay will last thereafter. Since 1981, the BBC's share of TV audiences in Britain has fallen from 51 per cent to below 35 per cent. True, it has fared better in radio, where BBC channels collectively still have more than half the market, while even in TV it has been less badly hit by the march of multi-channel TV than ITV.

Even so, there's no doubt what being forced to concentrate on a heavy mix of arts, news, religious and educational programming will do for the ratings; it will poleaxe them, and without the ratings, the licence fee will lose its raison d'être. At what level of audience share does the justification for a universally imposed tax disappear? Some people might say that even at 35 per cent, it's perilously close, but certainly at under 25 per cent it would be hard to argue that the current licence fee represented a sensible use of national resource.

With the march of digital and the advent of broadband, the competition for eyeballs can only get steadily more intense. The Government's promise to review the licence fee anew towards the end of the 10-year renewal period, and in particularly to examine the viability of alternative, subscription-based models, may come sooner than the BBC would like.

Pensions shortfall

the £400m the Government has allocated under its Financial Assistance Scheme (FAS) to bail out members of insolvent pension schemes always did look hopelessly inadequate, and yesterday ministers finally admitted it. In fact, the £400m will meet compensation only for those within three years of retirement, and even then only up to 80 per cent of their entitlement and a maximum of £12,000 a year. So what happens to the other 50,000 members of such schemes? Er, well, the Treasury will have to decide that, Malcolm Wicks, the Pensions minister, said yesterday.

Like so much of what passes for the Government's pensions policy, the compensation issue hasn't been properly thought through, and unless the Treasury can find another way of reclassifying current expenditure as investment, so as to stay within the Chancellor's precious golden rule, it's hard to see where the £800m shortfall is going to come from. Still, things could have been worse. Had the Government deliberately set up the rules to allow trustees of the Turner & Newall pension fund to decide the timing of their insolvency, the FAS would be lumbered with that liability too, estimated at some £900m.

Instead the cost will fall to the spanking new, industry-funded Pensions Protection Fund, which comes into existence shortly. The PPF's chairman, Lawrence Churchill, was on hand alongside Mr Wicks yesterday at what was supposed to be the PPF's official launch. No wonder he looked so glum.

It is often hard to credit the Government's various pensions initiatives with the declared aim of improving things. Most of them seem deliberately designed to make a bad situation worse. The PPF, which makes solvent pension funds bail out insolvent ones, is just another nail in the coffin. If more nails are required, Watson Wyatt was on hand this week with a bag full. In a new report, the consulting actuaries recommend that pension funds further reduce their holdings of equities and replace them with government bonds.

Since this would only crystallise the pension fund deficits that have spread like a plague through corporate Britain over the past five years, it's hard to see how switching to bonds amounts to sound advice. I'm going to keep this paper, and if I'm still in this profession in 10 years' time, I'll return to it to demonstrate just how much damage the present cult of fixed income, led from the front by HM Treasury, has inflicted on our beleaguered pensions industry. Remember, it was the consulting actuaries who encouraged companies to take prolonged contribution holidays in the 1990s, thus compounding the present state of underfunding. How wrong can you be?