The writer is the author of several books on the City and Wall Street
“Busy doing nothing, working the whole day through.” Although he is better known as a crooner than a banking sage, Bing Crosby’s 1949 standard worked well for the UK’s retail banks last year. By avoiding major blunders, riding the interest rate cycle and working hard at what they know best, the big three listed high street banks, Lloyds, Barclays and NatWest, all of which have recently reported strong annual results, returned over £10bn to shareholders in the form of dividends and share buybacks.
The share prices of all three banks have soared, partly closing an embarrassing discount to book value, cutting the cost of capital and reducing vulnerability to activists.
“Doing nothing”, of course, understates the difficulty of running a bank. These are businesses of extraordinary complexity. The annual reports of the big three UK banks average over 400 pages each with a dizzying array of interlocking financial instruments covering millions of digital and face-to-face transactions. The potential for error, human or otherwise, is immense. Employee incentives are high, transparency is low and the industry’s culture is, let’s just say, a work in progress.
Navigating this is an achievement in itself and as the industry’s spotty history shows, cannot be taken for granted. Three cheers, then, for a good year safely locked down.
But there is no time for complacency. Last year, UK base rates hovered around the 5 per cent sweet spot, yielding easy net interest pickings — the difference between interest received on loans and the rate paid for deposits — juiced by low risk derivatives hedging. Therein lies danger. Amid investor acclaim, the temptation might be for boards to think they are geniuses and forget that the business environment has done much of the heavy lifting.
Hubris is not exactly rare in banking. In 2006, on the back of boom conditions, HBOS and Northern Rock grew their mortgage market share, over-leveraging their own balance sheets. The following year, convinced that scale was the key to global success, Barclays and RBS entered a fierce battle for rival Dutch bank ABN Amro. Over-bearing self-confidence replaced clear-headed analysis. The consequences, as we now know, were disastrous.
What are the risks of another outbreak of boardroom exuberance? The trigger points are never identical but there are three things to look out for.
First, self-inflicted wounds. British banks are notoriously gaffe prone. Barclays’ chequered history means that as recently as 2022 it was forced into an expensive settlement when it had to admit over-issuing regulated securities. In 2023, NatWest’s then chief executive Dame Alison Rose was forced to quit after naming Nigel Farage in a conversation about debanking. The car loans mis-selling case currently going through UK courts could prove expensive, particularly for market leader Lloyds.
Second, lower credit standards. Low credit impairments were a factor in 2024’s results and while there is no immediate prospect of a sharp increase, this should not be taken for granted. Geopolitical volatility is an obvious threat but so too is government exhortation to lend more in support of its growth strategy. Banking is the opposite of most industries, in which more volume absorbs overhead and increases margins. In banking, it usually means more lending and more risk.
High street banks no longer engage in market share wars such as the one between Barclays and NatWest in the 1990s. “Number one by ’91” proclaimed the former and “in the poo by ’92” replied the latter’s wits. But government pressure to fund growth, for example in housing, carries similar risk.
Third, diversification. Having established a platform of credibility, diversification through acquisition is now an option, in theory at least.
Yet with their core UK banking business recently expanded through mid-sized acquisitions — Barclays and NatWest bought Tesco’s and Sainsbury’s banking businesses respectively — buying another big retail bank looks like excessive concentration.
Growth into less-regulated activities, for example private banking and asset management, is probably more interesting. But while no business can stand still, adding a new activity that requires a different skillset and complex technology carries integration risk and management stretch.
Boards like to do things and chief executives like to leave legacies. But all three UK high street banks already have clearly articulated plans for organic growth. They should stick to them and follow the next line of Crosby’s classic by “trying to find lots of things not to do”.
