The bigger they are, the harder they fall. In the Old Testament book of Daniel, King Nebuchadnezzar was troubled by a dream of a mighty statue, with a head of gold, its arms and chest formed of silver, but its feet formed of iron and clay. In the vision, an enormous rock smashed its feet and brought the entire figure crashing to the ground.
The major banks have been such a colossus within the UK economy, and similarly a mixture of different services and acquisitions. Royal Bank of Scotland (RBS) is an obvious example. At its height, it had a £1.9 trillion balance sheet, a third larger than the UK's gross domestic product. But like Nebuchadnezzar's vision, the bank was destined to fail, its growth built on bad acquisitions and risky lending.
The financial crisis and its regulatory aftermath struck the banks at their foundations, forcing them to raise capital, scrap dividends and sell off operations. The universal banking model - offering retail banking, wholesale and investment banking anywhere across the globe - has retreated. Of the big five banks listed in London, only HSBC (HSBA) has shown much effort to retain a truly global mantle, and it may not be long for these shores.
The journey of Barclays (BARC) this year perfectly reflects this malaise. Investors rallied behind former chief executive Antony Jenkins' restructure of the business (we picked it as a Tip of the Year), crucially the reduction of the investment banking operation. But he was fired earlier this year, after a clash with the head of that division, and shareholders are unclear on how exactly the group's strategy will change.
In November, Mr Jenkins gave his first post-Barclays interview to the BBC's Kamal Ahmed, discussing his challenge to embed the company's refreshed values into the investment bank while battling on bonuses and dealing with conduct scandals in the gold markets, the foreign exchange markets, as well as bills for past sales of payment protection insurance: "I always believed it was a five to 10-year process to really reset the organisation, to clean out the bad business practices, to simplify the business model, to deliver the sort of performance the company could deliver and that shareholders deserve - it takes time."
But Mr Jenkins was not given that time. In firing him, Barclays chairman John McFarlane, praised him - rather tellingly - as a "tremendously successful retail banker", adding that improving returns was a different skill.
Cue much confusion about how the strategy would change, amid assurances from Mr McFarlane and other management staff that the current strategy and the "repositioning" of the investment bank will continue. News of further cuts at the investment bank underline the question of why a change was needed at the top, and the banking group's share price has now given up all of the gains made in this calendar year.
Disruption
Interestingly, Mr Jenkins has spent his break in Silicon Valley, returning like an exiled prophet to warn the industry of the looming threat from digital disruption, including the move to digital payments that we have previously covered.
"Most incumbents will struggle to transform themselves fast enough to be able to compete with the start-ups, and risk getting pushed back down the value chain into being essentially a capital-intensive utility," Mr Jenkins told the BBC. He predicts that this, mixed with other banking challenges, could reduce the amount of people working in financial services precipitously over the next decade, and branch numbers could be cut by half.
Meanwhile, the incumbents face challenger banks such as Virgin Money (VM.) that are not held back by the legacy costs of a branch network, acting via brokers instead, as well as the newer challenge of peer-to-peer, or marketplace, lending to both consumers and businesses.
Disruption was certainly in the air at the Financial Times 2015 banking summit. One of the peer-to-peer businesses presenting there, Funding Circle, has facilitated more than £1bn of loans in the five years since its launch, to 12,000 businesses in the UK, US, Germany, Spain and the Netherlands. It currently originates around £80m a month, and is growing rapidly.
"We've been called small for many, many years," co-founder Samir Desai told the summit. "But you keep growing at 100 per cent a year and eventually maybe someone will stop calling us small."
These players hold up the transparency of their loans in contrast to the opaque balance sheets of major lenders, and they are also clean of the reputational issues that have tainted banks. But they are as yet untested by a major financial crisis, hiding behind the justification that the monies deposited with them are 'investments', not 'savings', and so people understand the risks. For now, however, they are an increasing threat to the traditional lenders.
Regulation
Industry body the BBA has argued that UK lenders' competitiveness has been eroded by a wave of post-crisis regulation. This has reduced UK banking assets by 12 per cent since 2011, compared with a 23 per cent increase in the US, and 34 per cent in Hong Kong. It rails against further threats such as legislation ringfencing banks' investment banking operations from their retail banking businesses, as well as the prospect of the UK's exit from the European Union.
What is clear is that the regulatory-driven capital focus is leading to very different banking groups, as banks reduce their risk-weighted assets in order to improve their tier-one capital ratio - which is the ratio of that capital to those assets. But such fat-chopping has reduced lenders' ability to claim a universal banking model, while regulation and low interest rates have pushed them to search out higher-margin areas that have a lower cost of capital.
Hence part of the strategy at Standard Chartered (STAN) to rebuild its profitability is to focus on "more profitable and less capital-intensive retail, private banking and wealth management businesses". But, as we have previously reported former Swiss central bank chief Philipp Hildebrand's warnings that wealth management margins will shrink if global lenders pile in. "Banks will better serve the varied needs of the real economy if they have diversified business models, with diversified offerings of services," he said in early November, while calling for a regulatory pause to let the sector get back on its feet.
But it is not all doom and gloom for UK lenders. In fact, the big five all made it through the latest stress test undertaken by the Bank of England without having to change their capital-raising plans. Only StanChart and RBS failed elements of the test, but actions that they are already taking to improve their balance sheets proved enough to stay the regulator's hand. The BoE concluded that the UK banking sector has become "more resilient", given the aggregate tier-one capital ratio of 13 per cent across the industry.
Getting back up
In March 1933, US citizens mired in a great depression tuned in their radios to hear new president Franklin D Roosevelt giving his first fireside chat, devoted to rebuilding trust in the banking industry.
Certain bankers' incompetence or dishonesty had poisoned the system, he said: "They had used the money entrusted to them in speculations and unwise loans. This was, of course, not true in the vast majority of our banks, but it was true in enough of them to shock the people for a time into a sense of insecurity and to put them into a frame of mind where they did not differentiate, but seemed to assume that the acts of a comparative few had tainted them all."
Like FDR in the 1930s, British policymakers have been working to "straighten out" the situation. They may not have moved as quickly as their US counterparts to boost capital following the latest crash, but there is little doubt they have left a more resilient system. Whether or not it can be very profitable is another matter indeed.
Jumping aboard the black horse
One of the largely welcomed trends for investors in UK banking stocks has been the reduction in the government's stakes in RBS and Lloyds (LLOY), taken at the height of the financial crisis as the government compelled the major banks to recapitalise.
With RBS, there is a long way to go to remove the taxpayer's majority stake, even with a Conservative government that is willing to sell its holdings for less than Gordon Brown's Labour administration paid for them. Following a year's extension in last month's Autumn Statement, the government is now planning to sell £5.8bn each year from 2016-17 to 2020-21.
With Lloyds, a much more successful institutional share sale has seen the taxpayer's stake reduced below 10 per cent of the banking group, generating £1.2bn more than the initial investment, according to the government's figures.
While the bank's management would happily see the institutional 'drip-feed' of shares continue, retail investors have been made a promise that next spring the government will launch a retail share sale at a 5 per cent discount to the market, as well as the offer of a bonus share to be awarded for every 10 shares held for a year, although this incentive is capped at £200.
The challenge here, though, has been the stumbling Lloyds share price, which has pared back its book value premium to the other major lenders, with payouts for payment protection insurance misselling weighing on profits. It is currently knocking around the 73.6p break-even mark, below which the government was halting institutional sales.
The demand is huge. By October, 250,000 people had signed up at the government website, at gov.uk/lloydsshares, and investment platform provider Hargreaves Lansdown (HL.) said more than 170,000 users had signed for internet updates. There are a whole lot of people ready to tell Sid.
