If banking is really competitive, how can it be profitable?

Chief Executive of Abbey, a wholly-owned subsidiary of Banco Santander, the Spanish banking group, speaks to Cass students

Thursday, 20 December, 2007

António Horta-Osório, Chief Executive of Abbey, delivered the first in a new series of student-focussed Dean’s lectures. Mr Horta-Osório took as his theme: “If banking is really competitive, how can it be profitable?”

Mr Horta-Osório began by demonstrating that Spain, Portugal and the UK are the most profitable financial services markets in Europe. All three countries have an 18% plus return on equity (ROE) figure; the UK leads the way at 21% , a return that sets them apart when you consider the FTSE100 market average is a 16% ROE. Of course, you wouldn’t expect the Chief Executive of Abbey to deliver a lecture at one of the UK’s leading business schools and not mention that within these markets Santander, Abbey’s parent company, is one of the best performers.

The competition for new customers in the financial services market is fierce. The market is driven by highly attractive rates, designed to acquire new customers, and is now more diverse than ever thanks to the increased access to information. One source of information that is of increasing significance is the internet. There has been a steady growth in online product sales; more than a quarter of credit cards in the UK are now sold online, as opposed to 15% five years ago.

In conclusion, Mr Horta-Osório explained that the key to obtaining a competitive edge is to seek efficiency gains relentlessly, which combined with superior customer service, will allow the bank to develop and manage strong customer relationships over a lifetime. In this process, for example, offering low rates is an effective incentive, but it needs to be followed up. A customer may be enticed by a low APR on a two year personal loan but it is essential to cross-sell other products, such as insurance, if the relationship is to out live the term of the loan. If you are successful at maximising revenue streams from each customer, you are likely to produce a healthy profit in the competitive financial services market, if you combine it with a cost-income below the market average.

The lecture was followed by a lively question and answer session conducted by Dean of Cass Richard Gillingwater.