Examination of witnesses (Questions 120
- 139)
TUESDAY 18 APRIL
2000
MR MATTHEW
BARRETT, MR
BILL DALTON
and MR PETER
ELLWOOD
120. But you have confirmed that you are going
to go on closing branches.
(Mr Barrett) I shall go on adapting the distribution
network as the customers define it.
121. Earlier you said you would go on closing
branches.
(Mr Barrett) Yes; if that means closing branches we
shall do it.
Chairman
122. Mr Dalton, you are not going to follow
Mr Ellwood in his pledge not to close any branches where it risks
leaving a community without a bank at all.
(Mr Dalton) I should be happy to follow Mr Ellwood's
pledge but we do not have a branch closing strategy, we are in
branch opening mode.
123. So you are not in that position.
(Mr Dalton) No, we are not.
124. Mr Barrett has not accepted that.
(Mr Barrett) Different strategies are what makes a
market. When I get my productivity ratio down closer to Lloyds
I shall reconsider it.
Mr Plaskitt
125. You have changed policy, you are not going
to close them where it risks leaving a community without a bank
at all. Does that mean you are going to be continuing to run non-viable
branches?
(Mr Ellwood) Some of those branches, where it is the
last branch in town, will indeed be incurring a small loss which
we are happy to live with.
126. You are prepared to subsidise that in effect
from other parts of your business.
(Mr Ellwood) It is a pretty small loss in a number
of those cases but the answer to your question is yes. We think
the branch network is absolutely vital to the prosperity of the
group and we have 2,300 branches, several hundred more than Barclays,
600 more than HSBC, 600 more than the old NatWest. Whilst we have
closed branches over the last few years, if you compare that figure
of 2,300 branches to the number the old Lloyds customers had,
about 1,800 and the old TSB customers had 1,100, so they now have
a lot more branches than they had. The focus of our consolidation
will really be where two branches are very, very close together,
which we are able to do because of the merger, usually within
half a mile, often within the same high street. That is where
the focus of our attention will be.
127. To be clear: you are not going to close
them where it will result in the withdrawal of banking facilities.
(Mr Ellwood) Where we are the last branch in town.
128. Where you are the last branch. Mr Dalton,
HSBC, although you have reduced the branches by 20 per cent since
1988 you have now come to a stop and you are opening branches.
Correct?
(Mr Dalton) Correct.
129. This leaves Barclays out on a limb on the
policy of branch closure.
(Mr Barrett) Our policy of branch closures in remote
locations where there is insufficient customer demand to justify
their continuance, yes, I shall deal with those issues as they
occur.
Sir Michael Spicer
130. It was said earlier that rising interest
rates were bad for banking business. Because of fiscal laxity
in the budget and therefore rising interest rates which lie ahead
are there storm clouds ahead for the banking sector and will that
result in further closures of branches?
(Mr Barrett) No, I do not think that would lead to
closures. There are small storm clouds; we saw it in the correction
in the stock market which was a little frightening and we shall
see where that goes. It seems to have recovered and stabilised.
The spectre of growing inflation is a worry. What I am more confident
about than I was in the past is that central banks are much better
at managing a monetary policy than they were in the previous decades
and that is why we have had such a prolonged cycle. I think they
will address it before it becomes a problem. We are already seeing
just—I do not want to overdo this point—a little bit
of strain in terms of the ratio of household debt to household
income in the country which is climbing. You are seeing a little
bit higher delinquency and default rates in certain aspects of
the economy. It is not a red light, but it is an area where we
are paying more attention and not as relaxed as we were a year
or two ago.
131. Will these potential storm clouds affect
the policy which you have just enunciated, Mr Ellwood and Mr Dalton?
(Mr Ellwood) If we do see rising interest rates, we
do not think it will affect the number of branches at all. The
challenge for the banks is dealing with greater competition, particularly
new competitors coming in and we do that by getting closer to
our customers, better understanding and meeting their needs. That
is where the real challenge is.
(Mr Dalton) The kind of interest rates to which I
was referring which caused us a lot of problems because they caused
our customers a lot of problems are substantially in excess of
the rates which we see now.
132. You are talking presumably about rising
interest rates.
(Mr Dalton) I am talking about high interest rates.
I am thinking about the days when the rates were 10, 12 even 15
or more per cent. Those create great difficulties for bank customers.
Mr Cousins
133. Do you actually know how much it costs
to do a teller machine transaction?
(Mr Ellwood) Yes, we believe we do.
134. You believe you do.
(Mr Ellwood) Yes, we do know how much it costs and
that is the figure which I quoted earlier. That is why we are
able to look at cost and to some extent that will mirror the price
we are charging.
Chairman
135. That is your 38p.
(Mr Ellwood) Yes.
Mr Cousins
136. Is that full cost loaded?
(Mr Ellwood) Absolutely.
(Mr Dalton) We have similar numbers but costing is
an inexact science. It depends on how much of the cost of the
salary of people who work in head office is allocated to that
transaction. We do have a cost but because of the imprecise nature
of costing it is imprecise at best.
(Mr Barrett) It would be in the range you have discussed.
You get into interminable arguments about standard costs, variable
costs, fixed costs and allocation of overheads and all of the
good stuff. What it generally is reasonable to assume is that
the cost ranges in between 30p and 40p per transaction. If I were
an outside supplier looking at that as a business alone that is
what I would budget as what it is probably going to cost me to
stay in that game and therefore what my profits might be off it.
It would be in that range.
137. Do you actually know how much branches
make? Do you have profitability accounts for each branch?
(Mr Dalton) Yes, we do.
138. Full cost loaded.
(Mr Dalton) Yes, we do.
(Mr Barrett) The only caveat I would put on that answer
would be yes, we have deadly data which can tell us what both
the usage and the profitability of each branch is. They used to
be independent profit centres but they are now sales and service
outlets. We do not run P&L by branch any more at Barclays
but we have a matrix which can tell us exactly what the profit
contribution is based on the volumes of business done at that
branch.
(Mr Ellwood) We do not run our branch network on an
independent profit basis, we run it on levels of customer service
and sales. We can identify exactly the level of profit as a result
of allocating central costs.
139. If your knowledge of costs is not structured
to produce unit costs in that way how do you deal with cross-subsidy?
How do you even know about cross-subsidy?
(Mr Ellwood) The focus of the branch manager is really
not to worry too much about the central information technology
costs for instance. His principal role is to get closer to the
customer, improve the service and ensure that he can identify
the relevant sales to bring about. We actually measure him on
those two rather than a finite cost figure which is only arrived
at by allocating costs from the centre. It is more relevant for
that local branch manager to be measured on things which he can
control.
(Mr Dalton) We do the same thing. We do not charge
branch managers with responsibility to manage costs over which
they have no control, for example computer costs, premises costs
in some cases. We measure our branch managers as well on customer
service and things like that.
(Mr Barrett) The same.
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