Investment and Private banking - Assignment Example

Investment and Private Banking s 13th July, Table of Contents Table of Contents 2 Executive summary 3Introduction 3 The main features of the market 4 Growth and size 4 Competition 5 Changes 5 Market structure 7 Emerging issues 7 Hoares & Co. Bank 8 Background information 8 Financial features 9 Products & services 11 Past and future strategy 12 Conclusion and recommendation 13 References 14 Appendices 16 Executive summary This report analyses the United Kingdom’s banking sector with a special emphasis on private banking. Hoare’s Bank has been used as a case example of a private bank in the UK. The report also gives recommendations on what can make ensure the bank continued to achieve consistent growth. A large market share of the UK banking sector is at the hands of a few banks due to mergers and acquisition. This has made the market less competitive due to reduction in the number of independent private banks. However, UK has been successful for many years as a financial sector with many foreign banks entering the market. Hoare’s bank has defied the above mergers and acquisitions and remains as one of the oldest independent private bank in the UK. It is managed and financed by the descendants of Sir Richard Hoare who was its founder. The bank has been profitable for many years and maintains a relatively small customer base. This has enabled it to specialize in personalized private banking. It has a range of banking services tailored to satisfy individual’s customer needs as well as wealth management. The bank has put up measures to ensure that only trusted and high net worth individuals open accounts at the bank. The bank has also embraced IT to help it improve the efficiency of service delivery. However, it is recommended that the branch should open more branches to add to the current two and thus give access to more customers. It should also improve its IT systems to deter cyber frauds. Introduction In the 1960s, there were eleven English clearing banks and five Scottish banks (Melton 2002). Five decades later, mergers and acquisition have led to the creation of four major players in the UK namely; Barclays, Lloyds Banking Group, Royal Bank of Scotland, and HSBC (Temim & Voth 2013). The five banks currently command a combined market share of approximately 80% with other small banks sharing the rest (see figure 2). In the past, the supervisory role was traditionally carried out by Bank of England (Sheppard 2013). However, in the recent past some of the roles have been delegated to Securities and Investment Board which include regulation of financial activities (Singh 2007). Generally, the banking industry alone contributes more than half of what is contributed by the financial sector into the economy. This makes it size to equal that of the telecommunication and post industries combined. Furthermore, collectively the balance sheets held by the UK banks is more than five times the UK GDP with the first three largest banks having individual assets more the UK GDP annually. In comparison with G20 economies, the UK banking industry is the second largest in size after Switzerland (Mullineux 2012). The main features of the market Growth and size In the past decade, the banking sector in the UK has experienced growth which compared to the economy was 50% faster. In particular, UK banks has a return on capital of 28% and a return on asset of 1.2% which is similar to the levels in the US and higher than the figures posted in Japan and other parts of Europe (IMF 2013). Currently, the sector contributes the highest proportion to international lending which is almost 20% of total of approximately $8, 290 billions transacted annually (see figure 3). It is also the second after Japan in having the highest number of global banks which stands at six (Giudice, Kuenzel & Springbett 2012). In terms of financial services, UK provides the third most preferred banking after Luxembourg and Switzerland. Similarly, London alone account for approximately 36% of foreign exchange carried out internationally in the entire world trade. In comparison to other centres of finance, it also the highest number of foreign banks. To ease transaction, the UK banking industry has adopted millions of multifunctional cheques, debit and credit cards. Moreover, it is serviced by thousands of ATMs mostly located away from the branches and the sector is responsible for around 2% of employment in the UK (Mullineux 2012). Competition The UK banking industry is not highly competitive due to mergers and acquisitions (Schubert 2010). However, to cope with the rising competition from retail groups, cooperatives and other building societies, the banks have introduced retail banking in the extensive branch networks, increasing the number of working hours as well as introducing a range of financial packages to suit the needs of the clients. Besides, the banks have indulged in specialized lending and advisory services to fully address the needs of the corporate clients. Changes The UK banking industry is also experiencing the conversion of the building societies which has added billions of pounds to the sector. In a drastic shift from the past, the Bank of England does relate directly with the banks in the management of money markets shifting from the use of money markets. The industry has also embraced securitization which has enhanced flexibility in balance sheet management, reduction in credit risk and enabled the transfer of market risks to the shareholders (Mullineux 2012). Furthermore, Real Time Gross Settlement has been introduced to reduce the risk associated with failure of an institution to honour its settlement obligations. This has helped to caution other institution from facing financial difficulties culminating from another institution failure to make the necessary payments. Currently, the banks in the UK are experiencing a change in the management via the introduction fresh personnel. This is to help the banks to cope with the macroeconomic environment which has become very fragile on the global front by introducing new courses. This is in a bind to restore the credibility of the financial institution and repay the trust bestowed upon them by the customers. To effect the necessary institutional transformation they are bound to make bold decisions and inject fresh ideas through innovation. The above change in management coupled with strict regulatory authority spearheaded by the Central Bank and Financial Policy Committee has resulted to a complete change UK banking industry (Singh 2007). This has been enhanced further by introduction of new Banking standards by the Parliamentary Commission to help address cases of misconduct by senior management officials. Any misconduct by a senior staff is thus regarded as a criminal offense. International banks in the UK also are facing increased cost of trying to meet various international standards. Some increase in the cause has been brought about by changes in the banking markets since different countries are setting their own rules and standards to govern the industry. This is in regard to the required liquidity, capital base, structural requirements and governance. This move is meant to help the different areas of jurisdiction exercise some form of control. Since most banks in the UK have branches internationally, they have not been spared in these transformations (Singh 2007). Therefore most foreign banks are opting to carry out operations as subsidiaries instead of branches while at the same time having to meet the strict liquidity requirements. However, this lack of consensus among the global regulators is stifling the growth and operation of international banks in the UK. Market structure In the last three decades, there has been a reduction in the number of banks in the UK by 50% to around 260. A similar decline has been registered in the number of mutual building societies. This has been brought about by the acquisition of small and medium investment banks by major foreign banks (Schubert 2010). Additionally, mergers of banks incorporated in the UK saw the reduction of banks by 15% over a period between 1999 and 2005. Consequently, only a few independent private banks are still operational in the UK. A significant section of the market is covered by foreign banks. They mainly focus on foreign currencies and are commonly referred to as merchant banking. Thus, most of their activities does not involve the use of sterling pound and mainly use London as their centre of operation. On the other hand, the UK banks primarily engage in activities which involve the use of the sterling currency. On the same note, the UK banks has a very small share in investment banking with US and banks from other European countries dominating the industry (Richard 2012). The UK networks consume approximately 75% of the distribution cost in retail banking. Thus, most banks are cutting the cost spent to open new branches and channelling the money to self-service on the internet platform and mobile technologies (Richard 2012). This move towards digitalization has created a way of reducing cost by a significant margin while at the same time providing a solid foundation for future investments. In the long run, this will help the banks in the UK to record consistent growth as well as increasing customer loyalty and satisfaction. Emerging issues The banks in the UK continue to suffer redress, litigation and remediation sagas. On a two year period ending 2012, the five biggest banks in the UK suffered a combined litigation and regulation cost amounting to £17.8 billion. By mid 2013, Barclays alone suffered a cost of £2 billion which shows that these cost are consuming a significant amount of profit generated by the banks (Chalabi 2014). Unfortunately, going by trend in the last couple of years, this issue will continue being a stumbling block for years to come. Recently, there has been an increase cyber crime despite the banks boasting of cutting edge technology. In the year 2012, the banking industry registered a 12% in online fraud compared to the year 2011. The situation has been made worse due to the shift in motivations behind cyber assaults to include ideological and political reasons (Mollineux 2012). Failure to address this problem will make it the biggest threat to the financial sector some years to come. Hoares & Co. Bank Background information C. Hoare & Co started its operation in the 17th century which makes it the 5th oldest in the world. In the 21st century, it still operates as a private independent bank having survived mergers and acquisition that absorbed many independent banks after the end of Second World War (Richards 2012). Sir Richard Hoare was its founder and it remains a family owned company currently in the hands of the 11th generation of his direct descendants. The Executive Group comprise of five departmental heads, Chief and Deputy Chief Executive. The C.E.O is Mr. Jeremy Marshall deputized by David Green with the company having an employee base numbering approximately 400. In the year 2014, under the guidance of J. Marshall, the company managed to scope two awards on March and May. These awards are the Private Bank of the Year (Wealth Managers) and Client Service Quality (High Net worth 2014) by Citywealth Magic Circle and PAM Insight Wealth Management respectively (Hoare’s 2014). The bank operates two branches in London at Lowndes and 37 Fleet Street while maintaining close family links. To open an account on one of those branches, the customer has to be introduced to the officers at the bank by a person of character known to them. The potential customer balance sheet is strictly evaluated before he/she is booked for an appointment with a member of the Hoare family for a personal chat (Morais 2012). Finally, the family member gives a formal recommendation to the bank officer to inform the client whether he has been approved or not to join the bank. The membership is open to US based clients but they must possess significant assets in the UK to serve as a justification for joining the bank. It currently has around 10,000 customers which enable it to offer unique and personalized services (Hoare’s 2014). Financial features The bank uses a conservative approach to risks where they are closely monitored while adhering to strict limits. In addition, the bank acquires its finances from Hoare family on the basis of unlimited liability. To initiate growth and development, the bank relies entirely on retained earnings. In the last ten years, the bank has registered a consistent growth in its reserves and share capital which stood at £195 million by the year 2013 (see figure 1). The bank currently has a capitalization that stands over a billion sterling pounds (Hoare’s 2014). The bank has a return in capital of 10.9% which compared to 6.6% posted by Barclays bank highlights its significance (IMF 2013). This can be attributed to it’s sufficiently capitalization while maintaining a high liquidity ratio. In addition, 35% of its balance sheet is under the custodian of the Bank of England (Morais 2012). Thus, the bank is left with a manageable amount of capital for its bank financial operations. So the actual return on capital for the capital employed is far much higher than 10.9% which makes it one of the most profitable banks in the industry. The bank does not deal in investment banking or offering financial products to the public. The bank only extends loans to their most trusted customer. In the year 2011, 43% of the entire bank assets were given out either as loans or advances to the clients. This shows that the bank has a very high trust on their customer in terms of honouring their financial obligations (Morais 2012). However, since they possess an unlimited liability relationship with their financiers, the Hoares cousin has to personally approve each major loan. This process is very efficient since the cousins know most of their clients personally. Alternatively, they rely on their knowledge of the client finances before arriving at the decision of whether to extend the loan or not. Thus the decision is arrived very fast and at times it can be made within hours after the formal loan request from the customer is handed over. Every customer at the bank must maintain £25,000 as a minimum balance in their account. Failure to that, a £60 fine is charged every month in addition to payment ranging from 10-40 pence for carrying out an account transaction with the bank (Warwick 2014). The bank runs an investment management service where it charges its customers a fee that averages at 1%. This service does not cover the customers based in the US so as to avoid the huge reporting burden as per the foreign regulations. The bank has a well laid out IT system which has enabled approximately 70% of the clients to be served over the online platform. The system is pretty simplified to ensure that the clients do not face any difficulties while accessing financial services. This feature has seen the bank attract customer who fancy the interaction with a user friendly system (Morais 2012). On the contrary, other major banks in the industry have adopted sophisticated system due to mergers and acquisitions. This has resulted to an increase in the layers of security levels which make it difficulty for the clients to access the system. These diseconomies of scale do not affect Hoares bank since it has sacrificed its growth for the sake of top quality services to its esteemed customers. The bank has adopted a hands-off approach when dealing with its employee and customers. They are united by the belief that any economic misfortunes will have a dire consequence on all of them. Therefore this notion is used to foster transparency and accountability on all stakeholders. As reported on Barons.com (2014) the bank former C.E.O., A. S. Hoare claimed that, “No amount of regulation is ever going to get bankers to change. They need to have skin in the game.” Any family member in search of employment at the bank is required to first acquire professional experience from other financial institutions. The 2008 financial melt-down forced the bank to put measures in place that ensure they maintain top quality clients (Maude 2006). This has led to the phasing out of less lucrative clients while opening doors for new profitable individuals. In addition, most of the profit realized is ploughed back into the company to improve the banks lending capacity. This has helped the company to significantly increase its capital base for the last couple of years. Products & services Hoare offers various product and services in banking which include (Hoare’s 2014): Deposit accounts Interest bearing accounts Electronic payments Credit cards Foreign exchange services Overdrafts, loans and mortgages Pension and Retirement products Wealth management Past and future strategy In the past, the bank had not fully embraced the use of the internet to offer services to the customers. They had adopted an approach where the customer would deal with their staff directly. This was meant to create a personalized relationship by responding to the customer’s feelings and concerns in a more direct manner. Hoare the former C.E.O, who previously worked as a computer consultant, brought in a wealth of skills that heavily boosted the bank IT system (Morais 2012). Therefore, this has made it possible for client-banking transaction to be handled using the on-line services. Since this involve a huge step away from the past strategy, the bank has tried to maintain the personalized approach to service delivery by ensuring that the system is user friendly. Currently the bank looks forwards to embrace emerging technology in the future to enable it to increase efficiency in service delivery to its customer. Hoares bank was somehow lenient in the past by allowing its customers to retain a minimum of £10,000 in their account. However, as the bank tried to engaging the more profitable clients, it has moved the minimum balance up to £25,000 and charging £60 every month for those clients who fail to comply with these directives (Warwick 2014). This strategy is meant to ensure that only high net worth customers remain in the pool. In addition, due to reduction in the interest rates, it is not economically viable to maintain customers with low amount of deposited cash. The main goals and objective of the founders of bank in the 17th and 18th century was built around philanthropy (Chapman 2012). To exercise its corporate social responsibility and uphold this tradition, the bank initiated a Golden Bottle Trust in the year 1985. Three years ago, to help their customer donate various resources to charity, they launched a Master Charitable Trust. A single donation is set at a minimum of £250 and a minimum balance of £250,000. The Master Charitable Trust has been highly successful was given an award in the year 2012 as the ‘Best Service Innovation’ (Hoare’s 2014). The bank distinguishes itself from the rest by offering personalized services to its customer. It closes competitors in service delivery being Drummonds, Coutts & Co., Cazenove & Co, Childs & Co. and Lazard LLC. Thus, some of their future plans are to build a lasting relationship by understanding and creating ways to address their individual needs (Hens & Bachmann 2011). They not only help safeguards their customer wealth but also advise them on how to make investments and pass it on to other generations. Conclusion and recommendation The UK banking sector has recovered very well from the effects of the recent recession and London continues to serve as a preferred financial centre. Hoare’s bank still remains as an independent bank with a strong capital base and liquidity ratio. However, to register more growth and increase the customer base of high net worth individuals, it should open more branches across the UK. In addition, it should tighten its IT system to safeguards the funds of the customer seeking personalised services through private banking. References Chalabi, M. 2014. UK banks: how powerful are they?. The Guardian. Retrieved on July 11, 2014, from: http://www.theguardian.com/news/reality-check/2014/jan/17/uk-banks-how-powerful-are-they-ed-miliband-labour Chapman, C. 2012. The notable philanthropy of Hoare’s Bank. Philanthropy Impact. Retrieved on July 11, 2014, from: http://www.philanthropy-impact.org/article/notable-philanthropy-hoare%E2%80%99s-bank International Monetary Fund. (2013). International financial statistics country notes: 2008. Washington: International Monetary Fund. Giudice, G., Kuenzel, R., & Springbett, T. 2012. UK economy: The crisis in perspective : essays on the drivers of recent UK economic performance and lessons for the future. London: Routledge. Hens, T., & Bachmann, K. 2011. Behavioural finance for private banking. Chichester, England: John Wiley & Sons. Hoare’s Bank. 2014. About us. Retrieved on July 11, 2014, from: http://www.hoaresbank.co.uk/about-us Maude, D. 2006. Global private banking and wealth management: The new realities. Chichester, West Sussex, England: J. Wiley & Sons Melton, F. T. 2002. Sir Robert Clayton and the origins of English deposit banking, 1658-1685. Cambridge [Cambridgeshire: Cambridge University Press. Morais, R. 2012. Euro Crisis Benefits Storied Bank. Barrons. Retrieved on July 11, 2014, from: http://online.barrons.com/news/articles/SB50001424053111904571704577407973233243382 Mullineux, A. 2012. Uk Banking After Deregulation. Routledge. Richards, R. D. 2012. The early history of banking in England. New York: A.M. Kelley. Schubert, M. 2010. Mergers and Acquisitions (M&As) in the Banking Sector. Munich: GRIN Verlag GmbH. Sheppard, D. K. 2013. The growth and role of U.K. financial institutions, 1880-1962. London: Methuen. Singh, D. 2007. Banking regulation of UK and US financial markets. Aldershot: Ashgate. Temin, P., & Voth, H.-J. 2013. Prometheus shackled: Goldsmith Banks and Englands financial revolution after 1700. Oxford: Oxford University Press. Warwick-Ching, L. 2014. Changing strategies: New charges aimed at less lucrative clients. Financial Times. Retrieved on July 11, 2014, from: http://www.ft.com/intl/cms/s/0/c50419ce-0eda-11e1-b585-00144feabdc0.html#axzz379tbfaey Appendices Profitability of the Hoares Bank & Co., Figure 1. Source Hoares Bank & Co., About Us Figure 2 Source OFT 2013 Figure 3. Read More