Big Five banks turn to savings market in search of growth

As the bank reporting season arrives, investors focus on battle to lift top-line sales

Britain's major high street banks unveil their half-year results from next week and, for the first time in months, the gaze of the City will not be on how many bad debts Britain's largest lenders have racked up after three years of global stock market decline and frightening levels of consumer borrowing.

This is partly because the banks have proved themselves to be robust in the face of the downturn. But it is also because the attention of the City is turning to a problem which is far thornier in the long-term: how the UK's major lenders are going to breathe new life into sickly top-line figures.

Banks know the answer does not lie in major mergers and acquisitions, which have rarely been less popular among investors. They will also not be able to convincingly argue for reducing expenses - the past few years have been characterised by savage cost cutting, leaving little fat on the bones which could be got rid of.

But Eric Daniels, the new chief executive of Lloyds, Luqman Arnold, the recently installed incumbent at Abbey, and others will be under huge pressure to come up with another miracle cure to revive growth in the banks' core home markets of lending and savings products.

Simon Samuels, an analyst at Schroder Salomon Smith Barney, wrote in a recent note: "Revenue growth is becoming more difficult and faced with this slowdown, banks are attempting to gain market share and sell more products to their customers. The problem is, they cannot all be 'share of wallet' winners."

Mr Samuels added that "identifying the losers" would be very difficult. Those who end up as the also-rans may well be there because of imminent major changes to the entire regulatory regime governing the sale of savings and investments.

At the end of the year, the Government will deregulate the way products are sold, currently under a system known as polarisation, and the new regime will be phased in from early 2004.

Polarisation, introduced in the late 1980s, means companies must either be entirely independent advisers, offering the full range of products on the market, or they must go to the other extreme of being tied to only one provider. So-called Depolarisation, which will be introduced some time next year, will mean companies can be independent, tied or, in a new development, somewhere in the middle, offering the products of maybe four or five providers.

The stakes could not be higher for Britain's banks. Loosening the rules will provide enormous opportunities to swell their top lines through hefty new sales of savings, investments and pensions to customers who already have one of their current accounts, loans or credit cards.

But the game is a risky one as the banks are setting up very different models for cleaning up in this new bonanza of selling, so that not all of them will prevail. Indeed, as the changes to the regulations draw closer, the banks are being increasingly coy about the finer details of their battle plans.

However, Mr Daniels, who took over Lloyds' top job in June, brought the gaze of the Square Mile firmly on to him last week when he signalled Lloyds' Scottish Widows life insurance business could be on the block if he is not satisfied it will add much to the group's prospects for growth in the future.

The statement sent shockwaves through the market as Lloyds' previous management staked the bank's future on being a bancassurer when they handed over £7bn in 2000 for the Scottish company. The rationale for the deal was that long-term savings rather than current accounts and loans were where the growth lay, and as the owner of an insurer you could take not only the profit margin from distributing a product but also manufacturing it.

If Mr Daniels is having doubts about Scottish Widows now, he would only be echoing increasingly vocal views in the City that the bancassurance model, especially at a time when the fall in stock markets has wiped millions off the capital reserves of insurers, does not look too clever.

As a result Lloyds, as the only major bancassurer which does not also have other sales channels, could well be at a competitive disadvantage in the depolarised world.

Critics argue that, in contrast, banks which are able to form nimble relationships with insurers and fund managers can drive a hard bargain with their insurance partners. This keeps banks' own costs to a minimum. It should also enable the banks to deliver simple products to customers within the key 1 per cent price cap the Government is keen to impose on the industry.

Lloyds has been busy playing down the suggestion that Scottish Widows' days may be numbered. Peter Jordan, marketing director of the insurer, said that in the long-term, the bancassurance model would prevail over a system of ad hoc tie-ups with different partners. If this hypothesis is true, it will indeed be damaging for rivals such as Barclays, which has placed improving customer service at the top of its agenda while also going down the route of forming a cross-selling arrangement with Legal & General rather than buying an insurer outright.

So far, Barclays' tie-up with L&G has been profitable for the bank without showing any discernible signs of falling customer service. In contrast Scottish Widows has recently seen strong sales growth through the independent financial adviser network, but analysts believe the bank has not managed to significantly boost the number of products it is selling to its own customers.

The bank will also muddy its own waters following the regulatory changes, because it knows customers will not only want to walk into a branch and buy a Scottish Widows pension, they will also want to be offered the choice of one from, say, Standard Life.

Despite the fact that everyone hopes depolarisation will be the opportunity the banks have been waiting for to put a spring back into their steps, most admit privately they simply do not know how the market will change. One said: "It will be a bit like throwing the cards up into the air and watching where they land."