Author Ben Leonard

What do the wildly differing results reported by the big banks mean for the future of banking – and our high streets?

I hesitate to spoil your Monday but I need to talk about the banks – specifically, the annual results some of the major banks reported last week. To say the results were ‘mixed’ is one of the year’s great understatements: they ranged from Barclays trebling its profits to RBS reporting a loss – for the ninth consecutive year.

The sorry tale at RBS

Pride of place – at least as measured by column inches – must go to the Royal Bank of Scotland, which reported results for 2016 last week. The bank, which is 72% owned by the UK taxpayer, lost £7bn. This is more than treble its loss of £2bn in 2015 and marks the ninth consecutive year in which RBS has lost money. What caused the losses this time? Money set aside to deal with legal action in the US and an abandoned attempt to spin off its Williams and Glyns branches. And the bad news doesn’t end there: chief executive Ross McEwan has warned of more losses, branch closures and further job losses in the future.

RBS was rescued – ‘bailed out’ if you want to use that term – by the UK Government in 2008. As we’ve noted above, the bank is still 72% owned by you and me – the UK taxpayer.

It has made losses every year since then, and the cumulative losses stand now stand at £58bn, thanks to a combination of failed takeovers, restructuring charges, fines for misselling, legal costs, bad lending and losses on complicated credit and derivatives trade which clearly no-one at RBS understood.

It’s very simple to write ‘accumulated losses of £58bn.’

What does that mean to the average person?

Nothing – so let me try and put that into perspective for you. According to the UK Land Registry the average price of a house in the UK in December 2016 was £219,544.

Let us assume that, on average, two people live in each of those 264,000 houses: that makes more than half a million people, roughly equivalent to the population of Leicester. So you could argue that RBS has ‘lost’ every single house in Leicester…

Alternatively, we could turn to the stock market for a comparison. Companies have what’s known as a ‘market capitalisation:’ it is the total value of the company, calculated by the share value and the number of shares in issue – so if the shares are trading at £2 and there are a million shares issued, the market capitalisation of the company is £2m.

The market capitalisation (the total value) of Manchester United – arguably the world’s most famous football club – is $2.78bn (approximately £2.2bn). Whitbread, owners of pubs, hotels and the ubiquitous Costa Coffee, has a capitalisation of £6.97bn, while Marks and Spencer is valued at £5.36bn. That’s a combined market capitalisation of just over £14.5bn – or a quarter of the losses RBS has accumulated since the taxpayer rescued it. It is very tempting to think that in 2008 the right answer for the British taxpayer might have been ‘Let it go bust.’ We could then have spent a quarter of the money and owned Manchester United and M&S – plus Costa Coffee and everything that comes with it.

another bank in intensive care

Another bank in intensive care

Joining RBS in sick bay is the Co-Operative Bank, which has put itself up for sale. The bank – 20% owned by the Co-op Group – almost collapsed in 2013 as it revealed a £1.5bn ‘black hole’ in its accounts. Fortunately, it was bailed out by US hedge funds, not the taxpayer. But the bank hasn’t been able to strengthen its balance sheet since then thanks to low-interest rates and has now accepted the inevitable. The bank – with four million customers and well-known for its ethical standpoint – claims to be ‘a strong franchise.’ You suspect that potential buyers might be rather more interested in a strong balance sheet.

…But good news at last

Meanwhile, across the high street at Barclays, there was a very different set of figures to report, as profits for 2016 trebled to £3.2bn with the bank reporting ‘strong progress’ thanks to a successful restructuring programme and selling off its ‘non-core’ businesses – such as banks in Africa. Barclays is also thought to have benefited from the fall in the pound, post-Brexit, and chief executive Jes Stanley was in an upbeat mood: “We are now just months away from completing our restructuring,” he said, “And I am more optimistic than ever for prospects in 2017 and beyond.”

The view from Hong Kong

There was less good news some 6,000 miles away in Hong Kong for the Hong Kong and Shanghai Banking Corporation – or HSBC as we now know it. Profits for HSBC fell 62% to $7bn (approximately £5.7bn) thanks to a series of one-off costs, including selling its operations in Brazil. HSBC expressed concern about ‘volatile financial conditions’ and warned about the increase in global protectionism.

What does all this mean for future?

The shape of banking is irrevocably changing. The vast majority of people now bank online: unless you run a retail business and you need cash, there’s very little need to go into a bank branch. Someone pays you by cheque? You have to go to a branch to pay it in: when are you going to find time to do that?

Millennials (people who reached adulthood around the turn of the 21st Century) are moving rapidly towards digital banking. They simply don’t see the need to go into a bricks and mortar bank, so all those premises on the high street are not going to be needed.

Digital banking

The shift to digital banking is happening across the world as more and more traditional banks allow customers to manage their accounts from a smartphone – and the traditional banks are also under threat from new, digital-only banking start-ups.

Freed from the need to maintain high street premises – and also free of the historical liabilities and restrictions – these banks can offer better rates and lower fees. Their threat to ‘legacy banks’ is only going to increase.

In the past there was a reluctance among consumers to move banks; the old cliché was that more people got divorced than switched their bank accounts. But millennials are now showing a willingness to move – especially to the digital-only banks. In 2015 11% of North American customers switched banks, and 19% of those went to a bank with no bricks-and-mortar branches.

This pace of change is not going to slow down. Customers are not going to suddenly change their mind and start queueing at a bricks-and-mortar branch again. Some of the banks are going to continue suffering serious costs – and potential losses – from the cost of restructuring, and the high street will change again as bank branches inevitably close down.