Another ‘new normal’...
Steve Pateman, President, Chartered Banker Institute, speaks at Bangor University's Chartered Banker MBA 2022 Conference. Read his full speech which took place during Day 2 below.
I am sorry that I am unable to be with you today but I managed to double book myself - the takeaway for me being that I may have had a long and hopefully successful career in banking but I am not likely to make a good EA as I think about the next 10 years of my career!
I will talk a little later about the next 10 years but to do so, we should go back 40 years to when I started my career: to the time of Punk Rock, Margaret Thatcher, industrial unrest and sky high inflation - clearly some things never change!
I started my career at 16 at NatWest: in those days Banks were revered and hierarchical institutions and you had a job for life albeit one where the Bank would decide where your career went. The product range was narrow and very focused on retail banking services: everything was paper and moving money across borders could take days. SWIFT was in its infancy and the first swap between IBM and the World Bank was still a year or so away.
Access to financial services was quite limited - mortgages, credit cards and overdraft were often at the discretion of the Branch Manager who was seen as a pillar of the community. Scorecards didn’t exist - credit was largely a matter of judgement and an assessment of your prospects.
Some might say that’s not a bad thing - after all Michael Heseltine, who became a prominent politician in the 1980’s will tell you that he started Haymarket Publishing because the Bank Manager at his local branch in Bloomsbury backed him on the security of his watch.
There were some international banks - NatWest was one and I worked in the nascent International Division. The City was dominated by traditional Merchant Banks and person to person trading. It’s fair to say that financial regulation was very much as described in the comedy of the day, Yes Minister, as ‘whatever you want it to be’.
Career progression was very much about where you went to school and who you knew - I had been to a Grammar School in Kent and didn’t know anyone so my prospects were somewhat limited - still I had a job and with 3 million unemployed at that time that was all that mattered.
As the 1980’s took us from Punk to New Romantic to Kylie and Jason, the world of Banking moved just as quickly culminating in the deregulation of financial services in 1986 which heralded the move from person to person trading to electronic trading and settlement and allowed retail banks to merge with or acquire merchant banks. Product ranges started to expand in both retail and international banking and cross border corporate banking became a target market for many banks which was convenient for me as that’s where my career had taken me.
Financial Futures and Swaps gained traction as banks and companies started to understand that they could manage interest rate risk rather than just offer products with matched maturities or profiles.
Technology meant that money could move across borders for value that day and word processing units replaced typing pools albeit the branch and branch manager continued to be the focal point for retail banking in many towns and villages up and down the country albeit the Dads Army image of banking was now in its final days.
Bonuses arrived together with performance management, competency and skills frameworks and the management of your career was very much now down to you as banks started to embark on redundancy programmes responding to heightened investor interest in profitability rather than just pure profits.
The 1990’s saw the emergence of BritPop and a change in political direction as Tony Blair replaced John Major: it was a time of great change for banks: Basel I introduced the concept of capital adequacy and weighted risk assets which allowed regulators to assess appropriate levels of capital and investors to benchmark the comparative performance of banks.
Technology and Internationalisation went hand in hand with a continued preoccupation with the concept of universal banking combining investment, corporate and retail banking in as many locations as possible.
I started the decade as one of 2,500 recruits into NatWest Markets managing my first portfolio of just 10 clients and ended the decade running the large corporate business of NatWest which was resurrected from the demise of NatWest Markets with just 60 people - along the way, we had undertaken many ground breaking transactions - the first share buyback for Guinness, Convertible Bond for Compass and been involved in a host of M & A transactions; all I would say with just a fraction of the oversight that would be required today.
Investor influence grew culminating in the battle to acquire NatWest between RBS and Bank of Scotland in 2000: the first time that a major U.K. bank had ever faced such a challenge.
This Century as we have worked our way through Coldplay, Ed Sheeran and Taylor Swift, there have been further developments in the way in which capital and liquidity parameters are set within banks - some attribute the severity of the financial crisis to Basel 2 which reduced weightings on property backed loans to de mini is levels.
However the last 20 or so years have been dominated by world events and the extraordinary levels of Government interventions from 9/11 through the financial crisis and onto C19. Each intervention has sought to correct a market failing with the cumulative and in my view dangerous assumption that risk can always be passed on to the tax payer.
Prudential and conduct Regulation has increased significantly - in many cases to the benefit of all stakeholders albeit with a more generic landscape, the risk of financial exclusion has probably increased. However the emergence of specialist banks has helped address some of the gaps that emerged post the financial crisis.
Bank Managers are no longer that visible and in many cases not even there as everything has become digital - branch networks have shrunk and continue to do so as we bank on our phones and other devices: Call Centres and scorecards have created efficient tramlines for the delivery of banking products for customers that fit the target criteria.
Banks have also shrunk in many cases to their own borders as in response to investors they target capital efficiency - if you want exposure to banking in Europe, investors would prefer to buy the best bank in each country and banks are rewarded for returning surplus capital rather than deploying it on expansion.
The Global Swaps market was estimated at $542 trillion in 2018 and is still growing allowing mortgages and savings to be fixed in line with where markets see rates moving.
I continued my career at RBS undertaking the first PropCo and OpCo financing with Hilton Hotels and running the Corporate, Commercial and Business Banking parts of the. bank: I left NatWest in 2008 - fortuitous timing - to set up the Corporate Banking business at Santander and took responsibility for its U.K. banking businesses in 2011 when Spain was having its financial crisis - not such good timing. In order to strengthen the bank we created the 123 account which has gone on to be the fastest growing current account in U.K. banking history reaching balances of £50b in less than 3 years.
With an £80m marketing budget at my disposal and a brilliant Marketing Director, I learned much about consumer insight not to mention Formula One!
When ring fencing came along, I left Santander to became CEO of Shawbrook, a listed specialist lender and took the company private in 2017 at a price to book of 2x - the best priced exit transaction for investors in recent years, before taking the helm at Hodge.
The changes that I have seen in banking, taken together and in hindsight, are remarkable but at the time they didn’t seem so and indeed society and technology has moved on at pace so to survive, banks needed to do likewise.
For me, the most important change is that Banks are now businesses who fight for capital with their performance rigorously assessed by investors who allocate that capital; but at the same time, financial regulation has created an environment that arguably limits the discretion available to banks to manage capital, liquidity and indeed customer proposition, compared to many other industries.
I am not going to argue the rights and wrongs of regulation - that would take some time - but I do believe that appropriate well thought through controls on capital and liquidity are the best way to avoid a repeat of the 2008 financial crisis and that there does need to be some form of consumer protection. The question is where the lines are drawn.
To navigate this complexity, a Banking CEO today, has to be an all round business leader - a figure head but a far more accountable one than 40 years ago; their skill set has to be multi dimensional: they need a combination of:
• Strategic Vision and in particular appreciation of the opportunities created by technology
• Market Awareness, Competitor and Consumer Insight and the impact of various pricing and distribution strategies.
• Ability to positively engage with all stakeholders - Regulators, Government, Investors
• Understanding of how the bank works - from Technology and Operations through Finance, Risk and Distribution.
• Risk Management - from Credit to Operations to Compliance
• Finance - understanding the interaction between Capital and Liquidity as well as Regulatory Compliance with each: understanding how to optimise capital structures.
• Communication skills - knowing what to say and when.
• Ability to inspire and coach to get the best out of the team.
It’s hard to find all of these skills in one individual and I have had the privilege of working with many well known leaders in banks who had some of these characteristics in spaces but not others and indeed some had some less than helpful traits.
So the real objective for any CEO in banking and indeed any other business is to build the best team that you can within the right organisational structure: to ensure that there is always a 360 degree view around the ExCo table and that voices can be heard - even if they are at odds with yours. Listening to those voices may help you come to a better decision or indeed avoid a major pitfall.
At the end of the day, as CEO you make the final call - but it’s always going to be a better one if you surround yourself with individuals in command of their function or business and that was very clear in the way that banks were able to respond effectively to the restrictions placed on business and society by C19, albeit without the option of digital banking and online communication that would have been nigh on impossible.
Banking is at one extreme, vastly complex but can also be simple....
I sit on the Board of Bank of Ireland in Dublin; a national champion bank with the full retail and corporate banking product range, complex legacy systems that struggle to accommodate the fast moving pace of digital innovation with an annual investment spend in technology that runs into hundreds of millions across multi year programmes yet I have also recently led the build of a new start up bank specialising in property finance at a cost of less than £5m with annualised run rate costs of £3m which should break even in 18 months and produce a return on capital twice that of Bank of Ireland albeit maybe with a somewhat higher equity beta!
Investors can now choose between the specialist banks who offer higher returns with greater risk concentration and risk across the cycle and the mainstream banks that offer more consistent but lower returns - thus far, the specialists have traded above Book Value whilst the mainstream banks trade at a discount but the spectre of a prolonged period of heightened risk may well change that dynamic.
Regulation has undoubtedly created more banks for investors but the jury is out as to whether there is really more choice for the consumer - be that an individual or business and the cost of credit for those at the margin remains relatively high and the number of businesses and individuals in that category will undoubtedly increase as inflation squeezes discretionary incomes.
Of the new brigade of Fin Techs, Monzo - an App based mobile bank - and Revolut have made real inroads into transactional banking whilst a number of US banks are now targeting the U.K. market but thus far none of them has really developed a market change in lending dynamics and for Monzo and Revolut their implied market capitalisation is a colossally high multiple of their earnings - the last bank to be in that enviable position was Metro which now trades at just 3% of its peak market capitalisation: given some of the recent challenges at Monzo and Revolut, they took may fund it hard to maintain these heady valuations.
The future is as ever uncertain but full of opportunities as well as challenges.
Banks will need to evolve and change - both regulation and society will expect banks to be more responsible in the way that they allocate capital and play a role in how society responds to the climate and housing challenges that lie ahead not to mention the cyclical challenges of a potentially prolonged recession.
The Chartered Banker Institute has also changed somewhat from the Scottish Institute that I joined over 15 years ago - I think I am the first non-Scottish President which perhaps reflects the international reach that the CBI now enjoys together with thought leadership in areas such as responsible banking, green finance delivered in partnerships with universities and professional bodies alongside the more traditional suite of professional qualifications.
We now have 33,000 members in 107 countries over 5 Continents. The Chartered Banker MBA with Bangor is now in its 12th year and we hope to see our 1000th Graduate in the coming year - there are 850 alumni from more than 50 countries and the programme is one of the UK’s largest Executive Education MBAs. I would like to thank the team at Bangor - Bruce Vanstone, Stephen Jones and Lisa Jones as well as the CBMBA faculty, tutors and administration staff for all their hard work and support for this Programme.
Just as banks have embraced technology, so has the Institute: its now 10 years since we first moved away from traditional exam diets where candidates gather in the same room on the same day to a world where candidates can sit exams online when and where they want.
Our work in supporting how Banking can play its part in the meeting the environmental challenges that the world faced has led to the development of a unique global academy with the United Nations Environment Programme; the PRB Academy will launch next month and will provide professional training for banks and their staff on sustainability and social issues framed in the context of the UN Principles for Responsible Banking and the UN Sustainable Development Goals.
We are however still a small business and as a small business we will need to navigate the challenging economic waters that lie ahead as will many others: we are perhaps less reliant on finance than many businesses so we shouldn’t need the support of our bankers other than by way of the business we undertake with them but many businesses and individuals will need support so that they come through the challenges that lie ahead.
Finding the right balance between providing support and good risk management is a tricky balance for any bank and any CEO.
The banks did a great job in supporting businesses through C19 but much of that support was Government backed and I suspect the level of support would have been more muted had that support not been there - there will undoubtedly be expectations of further Government support to address the cost challenges in the supply chain we see today but a path that socialises losses and allows profits to be retained is a very rocky one that goes nowhere good.
Banks should lend shareholder capital and deposit monies responsibly and sustainably but they have perhaps been too one dimensional in their assessment of a through the cycle risk profile of a business or individual relying too heavily on scorecards that drive optimal capital outcomes rather than using some of the judgements that helped individuals and businesses through many of the economic cycles of the past - the need to recognise loss through IRFS 9 perhaps accelerates crystallisation activities to the detriment of the borrower.
The next decade will present as many challenges and opportunities as the last few have - new normals will be understood, managed and overtaken by emerging new normals but some basics will remain as they always have - banking is about managing risk not avoiding it, capital and liquidity are the benchmarks by which institutions should be measured and the inter relationship between risk and return is real and should never be forgotten - technology may well be more prevalent than it was in the past but that technology is at the end of the day deployed by executive teams.
Exercising judgement in selecting the right organisational structure to deliver that technology is and will always be the winning formula.
So, to conclude, new normals are in fact like fashion, just new for a short period - some fashions stick, others fade and some come back: something that was brought home to me when I took my kids to see Mamma Mia - the enjoyment they had that evening some 50 years after I first saw Abba shows that some things in life are indeed timeless. Banking has been with us since biblical times and will I am sure be with us in some form for the generations to come.