by Professor Richard Roberts, King’s College London
It looks like 2016 will see plenty of action among Britain’s new wave of challenger banks, though the recent market slide may delay developments.
Clydesdale Bank is expected to gain independence for the first time in 100 years , when it is floated by National Australia Bank. Metro Bank, which in 2010 became the first newly licensed high street bank in 150 years, is also poised for a public listing and fundraising.
And then there is Williams & Glyn, a back-to-the-future revival of the former Williams & Glyn’s Bank, a confection of acquisitions that disappeared into Royal Bank of Scotland in 1985. Its spin off is expected later in the year, with Santander rumoured to be interested.
The post-crisis proliferation of challenger banks, both branch owning and digital, is new and noteworthy. Over the long term, the trajectory of UK retail banking has run powerfully in the opposite direction — towards consolidation and concentration.
In 1825, there were 715 UK banks. By 1875, through mergers and closures, the number had halved to 381. By 1913, the count was down another three-quarters to 88. By then a handful of megabanks had emerged, with a headquarters in London and nationwide branch network.
By 1920 the ‘Big Five’ — Barclays, Lloyds, Midland, National Provincial and Westminster — had 66% of total deposits. Then the government called a halt to consolidation. But it resumed in the 1960s. By 2010, the Big Four, plus Nationwide and Santander, accounted for 80% of UK customer deposits.
Over the decades, there were two temporary reversals of the consolidation, both involving the conversion of financial mutuals, the trustee saving banks and the building societies, into challenger banks.
The first trustee savings bank, focused on serving small retail savers, was established in 1810. As savings banks’ funds had to be invested in government bonds or put on deposit with the Bank of England, there was no risk on the asset side.
But the trustee savings banks' were notably susceptible to fraud by managers, reflecting poor pay, and boards of trustees dominated by clergymen and other well meaning but financially hopeless souls. Nevertheless, the movement grew strongly and by 1861 they numbered 645. Thereafter amalgamations and closures gradually reduced the headcount to 88 in 1945.
The new giant
Post-war prosperity (and inflation) resulted in 20-fold deposit growth by 1975. That year trustee savings banks were granted operating powers equal to the banks, which they hailed as creating a ‘third force in banking’ and, with 11 million customers, the unleashing of ‘a high street giant’.
The TSB Group challenger bank was floated in 1987. Eager to expand, it acquired Hill Samuel, an investment bank, that went on a lending spree resulting in £500m of bad debts. Enfeebled and discredited, TSB was acquired by Lloyds Bank in 1995, forming Lloyds TSB and lowering the curtain on that adventure in challenger banking.
The first UK building society — a deposit taking mutual specialising in lending for house building and buying — was established in 1775. By 1900, there were no fewer than 2,300.
Amalgamations reduced the number to 300 by the time of the Building Societies Act 1986, which allowed them to convert to banks. A wave of conversions in the late 1990s, accounting for two-thirds of building society assets, created a set of 10 sizeable challenger banks. But this latest challenger quest was soon on the rocks. Some were promptly bought by banks to expand their mortgage businesses, while the others failed in the financial crisis of 2007-2008 and again, mostly ended up in the hands of a big bank.
But one of them, in the guise of Virgin Money, is among the latest wave of challengers. So too is TSB, the revived brand name for 631 former Lloyds TSB branches floated in 2014. Nine months later it was snapped up by Sabadell, Spain’s fifth largest bank, though arguably a challenger in the UK.
As ever, amalgamation is the fastest route to growth in banking and at some point consolidation is likely to become the trajectory for the new wave of challenger banks, just as it was for banks, savings banks and building societies in the past.
“We believe we’re Britain’s biggest challenger bank but we really want to take on the big guys,” TSB’s new boss told the BBC. “If that means rolling up some of the smaller banks we would consider doing that.”
Is the there a sense of the inevitable about the latest episode in UK challenger banking?
