Last updated: July 19, 2012 4:54 pm

Retail banks – elusive competition

The Co-op has been bold but will need time to make its presence felt

There was plenty of bluster on Thursday as the Co-operative Group bought a package of bank branches from Lloyds for up to £750m. Peter Marks, the Co-op boss, said it was the most significant development in high street banking for a decade. He is not the first to promise big changes. Since the financial crisis several new banking hopefuls (such as NBNK, Walton & Co and a minibus salesman called Dave starring in a TV series) have tried to set up shop but not quite made it. Those that have managed to get a bank going, such as Metro and Aldermore, remain relatively small.

One of the reasons new entrants have struggled is the need to convince investors to back the ventures. That has become harder as capital requirements have risen and potential returns have fallen. According to McKinsey, new regulations will push down return on equity in UK retail banking from 14 per cent to 7 per cent – a steeper drop than in Germany, Italy and France. It is hardly surprising that the company that ended up buying the Lloyds branches is mutually owned and not driven by returns on equity. Yet even this deal has been tweaked in the Co-op’s favour. The impact of regulation on current accounts is lighter than it is on mortgages and personal loans. The final package that Co-op will buy is more skewed towards current accounts and away from mortgages than was initially expected.

Thursday’s deal will help competition – the Co-op will have 7 per cent of the current account market, which is not to be sniffed at. But that will only make it number six, level with Nationwide, so it is perhaps not quite as significant as Mr Marks thinks. The big four of British banking will still be the big four, and that will remain the case until better economic times and the prospect of more impressive returns attract new money into the market.

Email the Lex team in confidence at lex@ft.com

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