Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 60 - 79)



  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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