13 March 2015
A takeover of TSB will be bad for British banking
It's less than a year since TSB was spun out of Lloyds and floated on the London Stock Exchange. Since last June, its shares have pretty much flatlined, as the newsflow that has emerged from the company has been fairly unexciting for shareholders.
For my part, I've been greatly reassured by the slow but positive progress in the bank. Bit by bit, chief executive Paul Pester has been turning the business into a high street bank that can credibly claim it does things differently. Its product literature is slowly being rewritten and redesigned to make it clearer for customers, and most of its products are fairly plain and simple - no nasty surprises lurking in the small print.
As I've written before, the most impressive part of the story for me is the way that TSB has structured the incentive plan for its executives. Don't worry, Paul Pester won't be going hungry. But compared to his competitors, his package is relatively modest, and there are sensible caps on how much of a bonus he can be paid. The picture couldn't look more different to Lloyds, where the CEO has just landed over £11.5m in shares due to the turnaround in the price over the last three years.
Permission to play the long game
Importantly, Pester seems to be comfortable with taking a long-term view, and not making unrealistic promises to his shareholders. Retail banking - carried out honestly - is not a high margin business. The days of high street banks making double digit returns are coming to an end - although it's clear that many banks and their shareholders have not come to terms with this reality.
Although I'd like to have seen TSB do more, and be more innovative, I'm much more comfortable with the boring reality than some kind of racy alternative. So the news this week that TSB is now in the sights of Spanish Bank, Banco Sabadell, filled me with disappointment.
Sabadell, which does not have a retail presence in the UK, has presumably been impressed with Santander's performance over here, and wants a piece of the action. Santander could not be more different to TSB. It has put together an incredibly aggressive proposition in the high street banking space, and is cleaning up in the current account switching wars. Its reports back to Spanish shareholders increasingly talk about its British business as a cash cow.
But Santander's model worries me. Its 123 account puts back meaningful sums of money into its customers' accounts every year, meaning its unlikely to be making much if any profit on this part of its business. This puts the pressure on to convert these current account customers into mortgages, savings, investments and insurance clients. And wherever commercial pressure is driving parts of a financial services business, the customer outcomes are often not great.
Sabadell unlikely to take a back seat
Sabadell has no track record in UK retail banking, so if its acquisition of TSB is successful, we will at least be spared a nasty top to bottom merger of the kind that is never good for customers. But it's hard to believe that Sabadell will not want to see TSB replicating some of the short-term results that Santander has produced. As a banking organisation, with over 100 years of history, let's not kid ourselves that Sabadell will sit back and leave Pester to get on with the job, free of interference.
The situation just goes to show how difficult it remains to build a credible, customer focused banking proposition in the UK. Good governance is key. And for all the shortcomings of the stock market, there is a certain democracy to it. Those who want a quick buck may not be impressed by TSB's unexciting performance over the last year - but there will be others who see the potential of a long-term, customer-focused, steady as she goes, strategy.
It's all the more disappointing that Lloyds was so quick to bite Sabadell's arm off and state that it would accept the offer. Lloyds still owns 50% of TSB and if it gives its blessing, it will be all but impossible for TSB to stop the takeover. It emphasises Lloyds' focus on the short-term.
Sabadell's offer for TSB is an important moment in the reconstruction of our retail banking sector, and I'm sad to say I'm not optimistic about the outcome.