Reputation Redemption or a Further Spiral for UK Banking Industry?
The financial crisis of 2008/09 cost banks and their reputation dearly. COVID-19 offers them the opportunity to regain the lost trust of consumers by being a lifeline to millions.
According to research conducted by Brand Finance in 2019, the banking industry on aggregate is still facing a reputation challenge, 12 years since the onset of the global financial crisis. While the regulatory measures taken since the crisis have indeed improved the industries reputation, its relatively poor reputation leaves the industry exposed.
In fact, out of 10 industries surveyed across 33 countries by Brand Finance, the banking industry ranks 9th in terms of reputation:
Investors, homeowners, rating agencies, and regulators are all among those to blame for the sub-prime mortgage crisis. However, it is the banks that emerged in 2009 as the primary whipping boys, rightly or wrongly. A theme that has persisted to this day.
Since 2008-09, banks have not done themselves any favours. From fictitious-accounts to money-laundering there have been numerous instances of some of the largest banks in the world behaving in a less than flattering manner.
Apart from the widespread scandals, anecdotally everyone has a story about long-queues in branches, less than satisfactory customer service levels, and pain points around loan applications.
It is ironic then that an industry that was one of the primary culprits of the global financial crisis, and one that has faced the scorn of consumers worldwide, has such a key role in supporting the global economy through the COVID-19 pandemic. In doing so, banking brands have a chance at reputation redemption for many of their previous errs.
It is particularly important for banks to have stronger brands than their competitors during a recession
Analysis conducted on the Brand Finance global 500 most valuable brands study, covering 3 recessionary periods, indicates that on average of the 100 brands that lost the most brand value during each recession, 74 of them were banks. On the other hand, of the 100 most successful brands during the recessions, 30 were banks.
Part of the methodology used by Brand Finance in the global study involves a holistic evaluation of the strength of each banking brand, known as the Brand Strength Index (BSI). The BSI covers the perception of all stakeholders of a bank in assessing its brand strength, not just consumers. Brand Strength is expressed as a number out of 100.
To illustrate the significance of the BSI, of the banks within the study, those with a BSI below 60 experienced an average decline in Brand Value of 20%. Whereas of the banks with a BSI above 70 the average fall in brand value was only 8%.
UK banks have a decision – give a lifeline to millions or again risk their reputation by pulling up the drawbridge
Much has been written about the economic impact of the spread of the COVID-19. The effects are clear to see. In fact, global GDP is forecasted to shrink nearly 4% , which would signal the largest global recession since the second world war.
Governments around the world have reacted swiftly with measures to secure businesses and jobs and keep the global economy relatively intact. In the US, President Trump announced a $2tn relief package, the largest in US history. In the UK the government have announced the furlough scheme, said to cost around $62bn. Further measures such as a $410bn package of government guaranteed loans for businesses and an additional $40bn of funds for public services are set to help ease the burden.
The cost of measures put in place by the UK government is estimated to result in a budget deficit of some $375bn, as the government seeks to raise money through the issuance of government bonds.
Despite the government guaranteeing loans made by banks (up $410bn of them), there are a number of cases of banks seeking personal guarantees on business owners before approving loans, as well as charging extortionate interest rates . Additionally, the slow rate of approval of loan applications has resulted in less than 1% of the government guaranteed loan amount being used by businesses. These are not exactly redeeming qualities for the banking industry.
The global banking industry is far better equipped to deal with an economic crisis than it was in 2009. Among the 1000 biggest banks in the world Average tier 1 capital (which is a core measure of a banks financial strength) rose 75% from between 2009 and 2019 ($1.129tn to $1.927tn). The UK increased its tier 1 capital by 19% over this period.
Furthermore, among the 1000 largest banks, CET1 ratios (tier 1 equity capital / risk-weighted assets) are significantly above the regulatory requirement:
Taking the current tier 1 capital for the UK ($399,079m) and multiplying it by the excess CET1 ratio (18.7-11.5% = 7.2%) results in excess capital tied up in the UK banks of $154bn. This capital should be made available to struggling businesses and consumers in order to keep as many businesses open and as many jobs in place as possible.
The use of the 11.5% Basel III percentage in the above calculation is conservative. The Bank of England announced in March that the countercyclical capital buffer has been reduced from 2.5% to 0% to enable banks to free up regulatory capital for the real economy. Further guidance on stopping share buybacks and dividend payments by banks were announced by the Prudential Regulation Authority.
Banks are understandably worried about businesses defaulting on new loans provided. Particularly given the uncertain future for many industries in the UK. However, there are two mitigating circumstances to consider. Firstly, as previously mentioned the government is guaranteeing $410bn worth of loans issued by banks. Secondly, according to another key metric of a bank’s health, the non-performing loans ratio , UK banks are much healthier than they were at the start of this pandemic than in 2009 (the lower the ratio the better):
Further stimulus was provided to the UK economy by the Bank of England, with a $250bn quantitative easing package, and a reduction in the interest rate it lends to commercial banks to an all time low of 0.1%. Commercial banks are expected to pass these reductions onto consumers and businesses, which makes stories of extortionate interest rates being charged to businesses even more irksome.
The UK banking industry is missing an opportunity by not approving loans or reacting slowly to loan applications. According Brand Finance research, consumers and businesses consider banks that are easiest to deal with, provide good customer service and provide a wide range of products that are useful. All key attributes when considering whom to seek a loan from:
The likes of Nationwide, Santander, Halifax, Barclays, Lloyds and NatWest would appear best placed then to serve businesses and consumers in the provision of livelihood saving loans. These banks are rated highest on these key attributes, and simultaneously have high consumer consideration for their services.
However, it is important that these banks use the array of available data, including consumer and business research to understand the business impact of increased customer demand for loans, and the potential likelihood of a greater number of loan defaults.
The Fight Against Neobanks
The poor reputation of the banking industry coupled with a shift towards digitalisation meant that neobanks (digital banks with no brick and mortar presence) were entering the industry and taking up a significant proportion of market share.
Neobanks simply had an offering that was far more customer centric and consumers responded. According to research conducted by Brand Finance among UK Banks, neobanks are rated more highly than traditional incumbent banks across numerous metrics:
Neobanks have typically faced the problem of low profitability. This is due to, among other things, a lack of scale and capital. Whilst many consumers use the likes of Monzo and Revolut, too few trusts these banks as their primary accounts with which to pay a salary into. As such, neobanks do not have the capital to generate greater income from lending activities.
Furthermore, the majority of digital banks do not offer business banking, which typically is more profitable than retail banking. As such, the likes of Monzo and Revolut are not accredited under the COVID-19 business interruption loans scheme (CIPLS).
Therefore, if these loans are provided by incumbent banks (whom are accredited under CIPLS) with relative ease, excellent customer service, and a great deal of support, then it presents a huge opportunity for traditional banks to re-establish themselves in the minds of the consumer.
Brand Finance recommends that brand owners take a holistic view on the impact of Covid-19 on all stakeholders of their brands. A broader, long-term brand evaluation is key to building reputation and brand value, both in the medium and long-term post COVID-19. This evaluation of the brand should be grounded in both research and financial impact, an area where Brand Finance has expertise. Additional resources are being made for companies in terms of thought-leadership, white papers and training through the Brand Finance Institute.