Examination of Witnesses (Questions 80-99)|
16 DECEMBER 2008
Q80 Mr Weir: Could you give us some
indication of the percentage that have suffered an increase in
the rate above base as a result of this? I would be very interested
in that. There is certainly information coming back from the small
businesses in my constituency, many of whom will not allow us
to name them publicly for fear of what the banks might do, so
we are in a vicious circle here, that they are suffering higher
increases above base from the banks when they go back for further
finance. These are not businesses, as far as I can see, in the
struggling category. I am very interested and I would like to
see some figures on this.
Mr Ibbetson: We are required as
part of the Government support to track the figures. We provide
those things to the Bank of England, so certainly they are tracked.
I would like to make one other point: the vast, vast majority
of our SMEs are base-rate linked, our funding is LIBOR based,
and there is a mismatch between base rate and LIBOR of about 130
bases points at the moment. We have committed that we will not
pass that funding cost on to the SMEs. We take that ourselves,
which ensures that the SMEs do get the full base rate reductions.
Q81 Mr Clapham: I think you were
in the previous session and you would have heard that question
about the banks failing to understand SMEs. Given the situation,
and in this particular crisis we see that perhaps the freedom
of the business development chap who is down at the coal face
is somewhat restricted, is it that which is causing the misunderstanding?
Ms Peacock: We are in a slightly
different position because we are a relatively small bank, Clydesdale
and Yorkshire, rather than a very large bank. We operate a local
model. 90% of our credit decisions are made by people in our business
centres rather than anywhere at head office and that has not changed
through the last six to nine months as conditions have deteriorated,
so there is certainly no pressure, if you like, from upon high,
from where we sit, to influence those local decisions. The other
point I would makeand it maybe comes back to a point around
supporting businesses and working closely with themis that
one of the things we track very closely is the number of businesses
that are, if you like, talking with our people in a bit more of
an intensive care mode, where that business might be entering
difficulties. Currently, and the number has not changedI
cannot say that it will not change going forwardwith about
75% of businesses that are, if you like, with our intensive care
team, we manage to work with them to restore them back to health.
That may change going forward. It has not changed thus far, and
it has not changed for us over the last few years.
Mr Maltby: We have a similar model
to Clydesdale. 90% of our decisions are done locally in the same
business environment as our customers sit, and we have a very
experienced relationship management force of 1,400 people around
the UK. On average, they have 21 years' experience with the bank,
and their average age is 42. These are people who have spent their
career working with small businesses in their local communities.
I do think that we as an organisation do spend our time understanding
small businesses and want to provide the support to them.
Mr Cooper: We have similar demographics
and so forth. One of the things we also do is that when we recruit
new relationship managers we get customers involved in the recruitment
process: "Would you be happy to work with this person?"
As part of induction and ongoing training, our relationship managers
spend at least one day a year with a business customer. I have
an example of someone who was in a sandwich shop yesterday. He
was in there buttering bread at 5.00 am and then cleaning all
the equipment afterwards, ordering stock, paying the banking and
so forth. We try to get as much experience in there as possible,
but we also randomly sample 2,000 or 3,000 customers a month:
"Tell us about your relationship manager." We take that
feedback and we apply it. If someone needs training because they
are not doing a good job, we learn from that. Our people are paid
partly based on what their customers tell us about them.
Q82 Mr Clapham: Obviously something
has happened. There has been a change in the way in which you
balance risk. How has that come about? When I look, for example,
at how Barclays work, you work with the expert at the centre,
who then has a relationship with the business relations manager
on the ground, and between them they make the decision. Is it
such because you have to be more cautious that the decision is
more with the central expert than it is with the guy who is working
with his businesses and knows about businesses? Is that the reason
for the change?
Mr Cooper: I would say it is not.
We use a combination of top down from the centre and bottom up
from the ground and we find that very useful. Perhaps I might
give you an example. If you were an accountancy practice, for
example, there would be a good relationship on the ground with
the relationship manager who will see that business for what is
happening on the ground, but that relationship manager may have
little idea as to what accountancy practices across the country
are experiencing and, therefore, that is why we have that combination
of approach. We have also found that quite useful with the customer.
With an accountancy practice, for example, in general terms accountants
may be collecting their debtors in, say, every 30 days. Our customer
on the ground may be on 50 days, in which case we are able to
say to the customer, "Look, your peer group is collecting
their cash quicker than you are. You might want to take some action
to address that." We have found that very powerful.
Mr Ibbetson: Over my time in SME
banking, I have seen both models of lending directly at the frontline
and more centralised lending. I have to say that I honestly do
not think it matters. The analogy I always draw is that when an
SME flicks the switch they want the light to go on. They are not
too worried about what the wiring is behind, as long as the light
goes on properly. The important thing is that we take the localness,
we take the understanding of credit, we do all the right things,
and then get the right answers. An advantage of having the centralised
credit function is consistency. I think at the moment that is
very importantit gives expertise and I think that is very
importantbut we must not lose sight of the localness and
we work really hard on that. A challenge we have at the moment
is making sure that we have our most experienced relationship
managers sitting alongside those SMEs that are finding life most
Q83 Mr Clapham: If the challenge
then is to make the localness much more pertinent, how do we go
about doing that?
Mr Ibbetson: I think we do it
quite well. We have 4,000 frontline relationship managers out
there with the businesses. They liaise very tightly with their
credit colleagues. I think we do it quite well. I have to say,
speaking to the SMEs that I have been speaking to, I very, very
rarely get a complaint to say that because the decisions are made
centrally it is the wrong decision. The clever thing is flicking
the switch and making the light come on. That is what we have
to focus on. Different models have different dynamics, but it
is addressing the SME and delivering to them what they want which
is the important perspective.
Q84 Chairman: Mr Cooper, just remind
me, is your bank the one that wrote around to all its customers
rather crudely telling them about the new terms and conditions?
Did you, rather uniquely, not take the tailored approach that
other banks took? Am I right in saying that?
Mr Cooper: That has been misrepresented.
We did not write to all our customers: we wrote to a small number
changing their overdraft rates. Some went up, some went down.
Q85 Mr Hoyle: How many is a small
Mr Cooper: 15% went up, 15% also
Q86 Mr Hoyle: I am not being funny,
but how many customers is 15%?
Mr Cooper: It is round about 80,000
customers. A small number.
Q87 Mr Hoyle: So it is 160,000 that
you have sent letters to.
Mr Cooper: Correct. Individual
letters, most of which were followed up by a phone conversation,
so it was not a standard circularthough it may have been
presented as such.
Q88 Chairman: Even so, it is quite
a deterioration in the nature of the relationship that you would
expect between a big bank and its customers to have. You did not
cover yourself in glory with that episode.
Mr Cooper: We spoke to most of
the customers we could on a face-by-face basis. Most of our customers
have actually responded fairly positively to that. Clearly those
who received a reduction in rates were more positive than those
Q89 Mr Hoyle: You keep telling us
this: some go up, some go down. Did the majority go up or did
the majority go down?
Mr Cooper: The majority were unchanged.
Q90 Mr Hoyle: I will try again. Did
the majority go up or did the majority go down? Forget the unchanged
because that is meaningless. What about did the majority go up
or did the majority go down? I suspect the majority went up.
Mr Cooper: That is not correct.
Q91 Mr Hoyle: More people benefited.
Mr Cooper: Correct.
Q92 Mr Hoyle: Than went up?
Mr Cooper: Correct.
Mr Hoyle: That is fine.
Q93 Chairman: We are giving you a
very easy time, I am very conscious of that. You may not feel
like it, but it feels like it from this side of the table. The
trouble is, one of the reasons we are in this messone of
them, it is not the only reasonis that the banks made so
many mis-judgments in the past. How can we trust you to get the
right answers now? You are saying you are doing all the right
things now, but the history of the last few years is that you
did not cover yourselves in glory really, did you?
Mr Maltby: One of the things that
Lloyds TSB particularly was criticised for in the most benign
times was being prudent on its lending policy. We believed that
we had a through-the-cycle lending policy, which is why we have
not had to change those lending policies and we can support our
customers in the good times and the bad times.
Q94 Chairman: You are saying you
did not make mistakes in the SME sector, you made them elsewhere.
Mr Maltby: I am saying that as
an organisation Lloyds TSB was a more prudent lender across its
group, and particularly the bit that I represent in terms of the
SME sector. We have a book that has a relatively low impairment
Q95 Chairman: I must ask your three
colleagues whether they were imprudent lenders or not in turn.
Do you think you were an imprudent lender in the past in the SME
Mr Cooper: I would not say necessarily
imprudent in terms of the SME sector. I think the industry as
a whole has lessons to learn from being, I guess, to a degree,
too liberal around providing access to finance. And Barclays has
had a part to play in that. Equally I think so has the consumer
had a part to play in that as well. I think it is important that
everyone learns lessons from this and that there is no knee-jerk
reaction from one extreme to another but finely balanced through
Ms Peacock: Chairman, I would
not say that Clydesdale or Yorkshire have been an imprudent lender
either in the business or personal sector. We did not get involved
in some of the activities on the fringe of the market and, as
a result, whilst we have not been immune from the wider factors
in the economy and in the global markets, we have been trading
through this as a bank relatively well. It really is not in our
interest to lend a penny to anybody who we do not believe can
pay us back. That is a philosophy we have had through this. Where
we have been accused, we have been accused of turning down opportunities
rather than taking them on board.
Mr Ibbetson: It is an interesting
question. I am reflecting on it. I do not think we have been imprudent
in any way. Within the Nat West brand and the Royal Bank brand
we have led the market for about 20 or 30 years and we have been
hugely supportive of this sector. I was just reflecting back to:
Was it different last time when we were in a recession and heading
for the recession as against this time? It is different this time.
I do not think we could be accused of being imprudent, but it
is different this time. There are a lot of other factors there
this time. It is far more global this time. We have issues like
energy prices that have been hugely volatile and far, far more
important this time. Things are different this time. I think we
need to do this time as we did last time, which is to support
the businesses and understand the businesses and stay close to
them. The important thing to recognise is that it is not in our
interests as banks to see SMEs fail. We want to be there, as we
get through this recession, supporting those same businesses,
and that is good commercial business for us.
Q96 Chairman: I have one last question
on this and that leads me nicely to it. Do you make money on your
SME books? Do you make money out of this? It sounds to me like
a loss-leader exercise for you now from what you are telling us.
Mr Ibbetson: With great caution
because I had a similar debate with the Competition Commission
when they were reviewing the profitability of the SME sector,
so I address it with great caution. Over the cycle of course,
this is business that we want to do, but it is a cycle and there
are downs and there are ups. Over the cycle, it is good business,
it is important business for us, it is important for our portfolio
and, if it were not, it would not be a sector that we would continue
Ms Peacock: Chairman, as a bank,
we made about £250 million post-tax profit in the last financial
year. We only made that from two sources. We made that profit
from individuals and we made it from the SME sector, so clearly
in the cycle both sectors are profitable for banks and I think
that is actually a healthy position to be in. It is in no one's
interests for banks to be unprofitable.
Mr Maltby: We have had relationships
with our small and medium businesses for some time and we do make
a profit, as an organisation, over that period.
Q97 Chairman: There is nothing wrong
with making a profit. It is all wonderful, what you are doing,
lending at base when the LIBOR is higher than base, but I am just
trying to establish whether you want to be philanthropes at present
or actually still running businesses.
Mr Maltby: No, it is something
that we feel very strongly, that this is a sector that is important
to us, as an organisation, and we recognise it through our cycle
as, we believe, the gap between base and LIBOR is not going to
remain at the level that it is always going forward, and we believe
that, as we have relationships with our customers for a period
of time, actually we will make a good and strong profit over that
Mr Cooper: I think a similar story.
I guess the one thing I would add is that it is a competitive
market and increasingly so. Two years ago, only one in 20 small
business multi-sourced financial needs and today it is one in
five, so small businesses are getting very adept at actually looking
around for their best needs and services at a very competitive
Q98 Miss Kirkbride: Just on that,
I think, in a way, the panel that we have here today are representative
of the small business sector in their banks, possibly with the
exception of Clydesdale and Royal, who perhaps have wider responsibilities
and perhaps have been more responsible in the past. If we had
your chief executives here, then we could actually lay claim to
the responsibility perhaps. NatWest/RBS's aggressive takeover
policy has not helped its balance sheet at the moment with the
tax-frame narrowing to 58%, so clearly across your banks as a
whole, including Barclays who, after all, have been bailed out
by the Middle East, you have been irresponsible, but your sector,
the bit that you are actually in charge of, the small businesses,
are now suffering to some extent because of the irresponsibility
of those at the top in your banks, I think is probably a fairer
judgment to take. Listening to you, I am with the Chairman in
that the anecdotal experience we have both in my own postbag and
in stuff we have had to the Committee does not entirely fit with
the picture that you have told us of today, so we are all struggling
to work out what the difference is. Is the difference the fact
that you are now claiming that, "Well, the world has changed
because of what has happened and we now have to price the risk,
and that really what we see in our anecdotes is the price of risk
and not the fact that we have changed our overall lending policies,
but we are just applying our previous policies, but with more
risk attached". Is that what it is?
Mr Ibbetson: Frankly, I would
agree with that, yes, I would agree with that.
Ms Peacock: Well, I am here representing
our bank and I think that a number of things are happening. The
conditions are getting tougher and we have always priced the risk
and we continue to price the risk. We are always trying to balance
the needs of all of our customers and we fix risk being on the
receiving end of additional cost-funding. Last year, we absorbed
quite a bit of that and one has to hope, going forward, that the
relationship between base and LIBOR, like one of the other banks
here has said this morning, one has to hope that that relationship
gets back more to normal, whatever "normal" is, situations.
Q99 Miss Kirkbride: Just before you
carry on, risk is likely to get worse, is it not, given what the
predictions are for the economy, so is our predicament going to
get worse for financing small businesses?
Mr Maltby: One of the things which,
I think, has become hopefully clear to the Committee is that,
as banks, we are dependent upon the ongoing success of our small
business customers. It is an important market for us all and it
is something that we take a lot of time over. One of the things
that we are doing to address the expectations that the economy
is going to be challenging next year is that we are rolling out
a series of 120 seminars, local seminars, so that each of our
customers and prospective customers can come and meet with local
experts, our own teams, to talk about how they can help themselves
and how we can help them to prosper during these more challenging
times, so I do not think it is just about the finance, but it
is the point Steve made earlier, it is about what businesses can
do themselves and how we can, along with other advisers, help
them in identifying how they can change their business model and
improve their prospects.