Of Special Interest
- Digital wallet spend in Europe & North America to increase by 40% in 2019, finds study
- Juniper forecasts mobile money transactions will exceed 200 billion by 2024
- Europe’s big bank problem: too much capital is trapped in the US, says Scope
- Banks can save the world from climate change, says former UN climate chief
- Research by NatWest reveals gender divide over attitudes to saving
- Later-Life lending market set to almost double in the next 10 years, finds report
- Barclays/Cebr report challenges nation to think differently about wealth
- Fifth of UK investors looking to debt investment, new research reveals
- Regtech will play a more important role in PSD2, says Mitek
- Banks turn to Fintech partnerships to improve customer experience, finds Fraedom
- New industry code to tackle fraud must deliver, says Which?
- New TTF report highlights loss of trust in financial services
- Arxan highlights financial app vulnerability epidemic
- SAS asks whether banks really need to choose between operations and innovation
- Which? raises alarm as almost 1,700 free ATMs become fee-charging
- Financial wellness affects half of peoples’ mental or physical health, finds report
- Study finds traditional financial institutions embrace Fintech disruption
- Grass is greener for environmentally friendly businesses, finds Barclays
- Prospective homeowners would consider a 40-year mortgage to escape renting, finds Santander
- Millennials’ needs are changing the face of banking industry, says new report
- FS is putting consumer data at risk by failing to protect mobile apps, says Arxan
- A lack of belief in their ability holds 28% women back in work, says Cambridge & Counties
- ‘Which?’ reveals Scotland has lost over a third of its bank branches in eight years
- Next downturn unlikely to be as bad as 2008, according to S&P
- FCA reveals findings from first cryptoassets consumer research
- US consumers favour single mobile app for banking and payments
- Banks suffering major IT shutdowns every day, ‘Which?’ reveals
- The US will be a key offshore centre in 2019, says GlobalData
- Debit industry changes markedly in 10 years of the Debit Issuer Study
- UK's ‘Big Five’ face ‘too big to compete’ as small challengers secure stellar returns
- Banks as vulnerable now as before crash, says new study
- Leverage ratio a constant conundrum for European and US banks, says SNL
26th May 2015
UK's ‘Big Five’ face ‘too big to compete’ as small challengers secure stellar returns
The UK challenger banking sector is outperforming the ‘Big Five’ UK high-street banks, however, the large challenger banks need to accelerate how they stand out in the market, according to a new KPMG report.
The new annual report, ‘The Game Changers’, analyses the full-year results of some of the largest UK challenger banks, grouped in three categories – the ‘Large Challengers’, ‘Small Challengers’ and ‘Retailer-owned’ banks.
The report reveals that while small challenger banks are securing stellar returns, key financial indicators of the large challengers, such as the return on equity, are becoming very similar to the ‘Big Five’ – Barclays, HSBC, Lloyds, RBS and Santander.
Return on equity in 2014: Small Challenger Group average: 18.2 per cent; Google: 15 per cent; Facebook: 11 per cent; Challenger Banking Sector average: 3.8 per cent; ‘Big Five’ UK banks: 2.8 per cent; Large Challenger Group average: 2.1 per cent.
Challenger banks overall, are also becoming more cost-efficient as they grow. In particular, as small challengers have grown, they have benefitted in a reduction in their cost-to-income ratio (CTI), from 65 to 53 per cent between 2012 and 2014. Larger challengers reported a higher CTI of 64 per cent in 2014 as many have inherited a higher cost base, which has yet to be optimised. These figures are remarkably similar to the ‘Big Five’, who reported an increase in their CTI from 60 to 63 per cent in the same period.
Warren Mead, head of challenger banking and alternative finance at KPMG, said: “Although the overall challenger banking sector is growing rapidly and securing greater returns, it is the small challengers who are driving its growth. Small challengers are securing high returns and have better cost optimisation. If this trend were to continue, as the challengers grow and benefit from economies of scale, it poses an interesting question for the Big Five as to whether ‘too big to fail’ becomes ‘too big to compete’?
“Financially, the large challengers are looking very similar to those of the traditional banks. To ensure they remain differentiated, they must review their brand, distribution, products, culture and customer service. Digital banking is a great example. Our report found that the mobile functionality of the challengers is at best equal to, but often worse than, the ‘Big Five’. For those challengers focusing on customer service or cost as a differentiator, this could be a major hurdle for the future.”
The report also revealed that the challenger banks are strengthening their balance sheets and embarking on a lending spree, while traditional banks reduce the size of their operations as a result of regulation. In 2014, lending assets grew 16 per cent, compared with a decline of 2.1 per cent for the ‘Big Five’.
This translated into an average annual 8.2 per cent growth in loans and advances to customers between 2012 and 2014, compared with a decline of 2.9 per cent from the ‘Big Five’. For large challengers, this was 3.2 per cent growth, while small challengers significantly grew their loan books by 32.3 per cent. However it should be noted that the combined loans of the five largest challengers are still just 5 per cent of the Big Five’s loan books, and therefore it is easier achieving higher levels of growth.