International banks reversing from retail

This retreat from high street banking by overseas banks is a result of soaring costs after investing heavily in capital and corporate structures. Now under pressure to cut expenses, they are looking to curtail their retail operations.

HSBC has announced planned cost savings of between US2,5bn and $3bn in the next three years, and is no longer planning to be "the world's local bank". The bank has a cost-to-income ratio of 60.9%, up from 49.7%. This is similar to that of Standard Bank.

HSBC CEO Stuart Gulliver says the bank's retail & wealth management division will be scaled down to cut costs. The strategic review entails focusing on specific product lines where greater growth and yields can be obtained.

HSBC's planned changes provide a clue as to why it walked away from a deal with Nedbank last year Gulliver, a recent appointment, was probably not keen on a transaction initiated by previous management because of the low return on equity at Nedbank's troubled retail operations. Cost cutting would have been the preferred strategy after a takeover, but this would not sit well with the local regulatory authorities.

Other banks that are scaling down their global retail operations include Citigroup, which is exiting the European retail market.

The thinking behind scaling down retail operations is that greater competition between banks and from hedge funds, as well as more stringent capital requirements from Basel 3, will force banks to grow in other areas, such as capital and corporate markets. Income in these divisions yields a greater return on equity, though the initial cost might be higher.

The drag retail has on a bank's operations is illustrated at Nedbank, where its retail division, comprising 45% of the bank's total assets, provides just 23% of its earnings.

Nedbank Capital, which has 35% of the bank's assets, contributes 25% of earnings. A similar picture exists at Nedbank Corporate, which has 28% of its assets but 31% of its headline earnings.

Barclays, which owns 55% of Absa, has a similar strategy of divesting from retail banking, as its steps in Russia and the Far East have shown. It is focusing on growing Barclays Capital, where CEO Bob Diamond proved his prowess.

That brings into question its plans for Absa, SA's biggest retail bank. Though Absa's top management has emphasised it remains committed to retail, steps taken indicate a preference for a further reduction of its reliance on retail.

Absa CEO Maria Ramos, speaking at the Gordon Institute of Business in Johannesburg, made it clear the bank was focusing on investing in Africa through its capital and commercial divisions. Retail has a low priority unless it can be done cost-effectively.

Ramos is not unduly perturbed at the bank's growing costs and says trade-offs have to be made at times, with IT investment the priority. This is illustrated by the R400m Absa is spending on introducing IT systems in Mozambique and Tanzania.

Diamond recently spent two weeks in SA and, according to Ramos, "is passionate about the Africa strategy".

The two other big local banks, First National Bank and Standard Bank, are committed to retail, though advances remain flat. This partly reflects the subdued local economy, but also demonstrates a bigger focus on cost savings rather than lending to retail customers.

It is not expected that the reduction in retail's role at the local banks will be as extensive as it is in the global banks. But chasing market share is clearly not the priority it was in the past.

Source: Financial Mail