Examination of witnesses (Questions 60
- 79)
TUESDAY 18 APRIL
2000
MR MATTHEW
BARRETT, MR
BILL DALTON
and MR PETER
ELLWOOD
60. Why did you not get it in place? It seems
blindingly obvious to you now. You are paid a lot of money. Why
did you not work this move out in advance? It was an absolute
disgrace, was it not?
(Mr Barrett) We shall have it in two weeks, so there
was a four-week interruption. We were not able to consummate and
finalise our arrangements with the Post Office for a national
rollout and a local rollout earlier. I wish we had but we did
not. We have corrected it so there is a small period of time before
those customers have back local ability to cash cheques and have
access to the Post Office. It is a positive move overall: I wish
it had been in place two weeks ago but it will be in place in
a week or two weeks from now. It is not perfect but it is a major
step forward and it is helpful for post offices, our customers
and for us. I think that more cooperative ventures like that can
be done. My entire experience is in a country where if you close
down a branch the closest branch is 1,000 miles away, unlike the
UK. Therefore it is a big issue and you try as many innovative
ways as you can to cooperate with post offices, cooperate with
stores, cooperate with the Government, cooperate with credit unions.
We cannot do it alone, we need help, and/or, if there is a regime
of expectation that there is an obligation for us to do so, then
I would ask public policy people like yourselves to think about
the applause we give to competitors who come into the cities,
cream skimming centred on populous areas, who are not required
to have branches in rural areas. I do not find too many Egg branches,
Virgin branches or foreign banks opening branches in remote communities.
To burden your domestic suppliers and your traditional suppliers
with that and yet applaud and encourage new entrants who do not
do it, is unsustainable from our point of view.
61. Do you feel any sense of social responsibility
to members of the public who have to pay cash machine charges,
who may not be very well off but have to make frequent visits
to the cash dispenser for small sums of money? Is that not a punitive
tax on them and do you not feel any sense of social responsibility
maybe to reduce the charge for people like that?
(Mr Barrett) We could get into an esoteric debate
on social responsibility.
62. Yes, let us do that.
(Mr Barrett) Do you want to do that?
63. Yes.
(Mr Barrett) Good. There are many much more fundamental
essential services in life which you and I would bemoan the fact
that people have difficulty with, be it the homeless, be it food,
shelter, an awful lot of services. I do not know too many commercial
enterprises ... When I go into Sainsbury's I have yet not found
a free food section. All I am trying to say is that even Government
itself, who is the most sensitive to these issues, has difficulty
meeting the needs of all of its communities. In our case we are
trying to price our products fairly, we are trying to give universal
access as best we can. I shall commit to you that we shall bring
out a basic banking service for the disadvantaged which allows
them to get access to banking. I am a huge believer in maximising
access, I really am, but I am also a huge believer in making profit
because that is the role of the corporation. I think we discharge
our social responsibility by creating profit which drives up shareholder
value, which provides pensions to the workers who invested in
the bank, which provides jobs for our young people, which pays
taxes which allow the Government to progress on its social programmes.
The social responsibility of business from my point of view is
running a profitable corporation and it does not serve anyone
well if it does not do that.
64. Your social responsibility would be served,
would it not, by getting cash machine charges down below one pound?
When do you expect to make an announcement on behalf of your bank
that you will be reducing it to below one pound?
(Mr Barrett) I shall wait and see. I do not predict
the market. I try to establish the market but I cannot enforce
disciplines on the market. The market will decide it and I shall
respond accordingly. You are seeing it in the mortgage market
today. You are seeing it in the credit card market today. You
are seeing a decline in margins and profitability in various product
lines as a result of competition and then we respond. I cannot
predict when that will happen, but we intend to be an intensely
competitive player in the market.
Mr Ruffley: It seems Lloyds TSB are ahead
of the game.
Sir Michael Spicer
65. It has been a continuing theme of all the
witnesses today that there is strong competition in the banking
sector. Mr Barrett used the words "intensively competitive".
It is a point of view with which I personally have some sympathy.
The question hangs over from it as to why these profits are so
high at the moment. Mr Ellwood came close to acknowledging this
when he used the words "good returns" for banking. My
specific question is: is it possible that one of the reasons for
this high profitability is high interest rates?
(Mr Barrett) No, I would not say that. Do you mean
high interest rates in the system?
66. Interest rates are high at the moment and
therefore you are presumably making a relatively high return on
your money because of the high interest rates.
(Mr Barrett) We probably make more money when interest
rates are low actually. It is a common myth that we make more
money when interest rates are high. You get margin compression
when interest rates are high, you get higher loan losses, etcetera.
If you were to give me a choice between high and low interest
rates as a banker intent on profit I would much rather have low
interest rates.
67. Would the other witnesses agree with that,
that low interest rates are better for banks in terms of profitability?
(Mr Dalton) They are. Bankers operate on spread, the
difference between what we earn on our loans and what we pay on
deposits. That spread is reasonably unchanged over the years,
in fact it has declined. It is better for our customers, particularly
our business customers, when rates are low. Ten years ago when
rates were very high in this country our bank was losing money.
We find strong economies have strong banks and banks are strong
when economies are strong. Therefore we prefer to have low rates
which strengthen the economy and our customers' business. We do
well when our customers do well and that is usually when interest
rates are low.
68. Is that the same for you?
(Mr Ellwood) I would agree with that, particularly
the aspect of high interest rates creating problems with bad debts.
69. Why is it that profits, particularly with
respect to SMEs, are so high at the moment?
(Mr Ellwood) I am not sure I would accept that profits
with respect to SMEs are that high.
70. You used the words "good returns".
(Mr Ellwood) Yes, returns across the group. The return
we make on SME markets at the present time is about 26 per cent
over the last two or three years averaged out. The SME profit
is about 10 per cent of our group profit. If you look at the level
of risk associated with SME, it is important that suppliers to
the SME sector do make reasonable returns, particularly because
the risk of writing off bad debts is much higher over the length
of the cycle. The sense we get from our SME customers is that
they are actually pleased with the level of service they get.
The independent research we do shows that over 90 per cent of
our SME customers say that they are satisfied or very satisfied
with the service and the package they get from Lloyds TSB. What
they are looking for is reliable consistent service. They are
looking at the quality of their main customer and charges, whether
interest charges or money transmission charges, are not the highest
thing on their agenda. They are really looking frequently to get
strong advice and to get consistent reliable service from their
service provider.
71. If the industry is in a phase of intense
competition, the normal process would be for profitability to
come down to some kind of equilibrium level. Why do you think
profits are so high across the board?
(Mr Barrett) Profits are strong at the moment but
the rising tide of a strong economy for several years is helpful.
As bankers we have to look at it cyclically adjusted. I have a
letter in fact from Mr Cruickshank confirming to me that Barclays'
profits are not deemed excessive over the cycle. One has to realise
that it has been a very benign environment for banks.
72. You said earlier that high interest rates
were a bad thing for banks, so it has not been so benign.
(Mr Barrett) If they get up there then your default
rate starts to increase. This is macroeconomic policy, monetary
policy. If interest rates get high it is because the economy is
overheating and you will find that most recessions are policy
induced. Only two since the war have been other than induced by
the need for central banks to raise interest rates extremely high
in order to dampen down demand. We have had a benign environment
in the sense that you have had good strong growth, good employment
and inflation numbers have been kept under control. The easing
up of interest rates now is a reflection of the fact that inflation
is starting to rear its head again and the central banks are trying
to manage that pace of growth down a bit so they do not have to
go to draconian interest rates down the road to correct it. I
think that is the right policy stance.
73. Cruickshank reported that you have significant
market power in lending to the small business sector. What is
your margin on lending to small businesses?
(Mr Dalton) Our interest margin is about 2.7 per cent.
74. What profit do you make on it? Mr Ellwood
said it was about 26 per cent.
(Mr Dalton) It is about the same.
75. You make about 26 per cent.
(Mr Dalton) It is about the same.
76. Cruickshank said the incumbent providers
currently make substantial excess profits from services provided
to small and medium sized businesses. Is 26 per cent excess?
(Mr Dalton) I do not think it is if you look at it
over a period of more than one year. It is relevant to look at
the profitability of banks over a period. The reality is that
one of the reasons that the bank's profitability is as high as
it is now is that although loan losses are fewer because the economic
cycle is better, it was not that many years ago when my bank,
which was then called Midland Bank, was making losses. It was
not that long ago that the bank was making £200 to £300
million a year which on a capital base of some £5 or £8
billion is not a great return. In the last couple of years those
returns have improved. I should like to think that it is because
we are giving our customers good service because we are doing
the right thing for them. In fact in 1999 our business increased
substantially. We did more things for more customers which was
one of the reasons our business improved and our profits improved.
It needs to be looked at over a period of time. In the case of
small business, it is particularly important because the loan
losses from that particular sector are very volatile.
77. What margin do you think would be excessive?
(Mr Dalton) Our return on equity over the last ten
years, taking out the last couple of exceptional years, is about
12 per cent which was about the same number as Mr Ellwood said.
That is more indicative of the kind of returns that are made on
bank capital. Looking ahead, most industry analysts are saying
that the returns which the banks are currently making are not
sustainable because of low loan losses, because of increased competition.
In the last few months there have been at least 20 new banks started
up in the UK. I agree with that and I think the profitability
will be impacted by all of those things.
78. What return would you regard as excessive?
(Mr Dalton) Excessive?
79. Yes. Mr Cruickshank said that current providers
were making substantial excess profits? You told us your rate
of return is 26 per cent.
(Mr Dalton) Yes.
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