Large corporates should not dismiss the Cruickshank report on UK banking as an issue of relevance only to personal and small business customers because it does not affect them directly. It is true that there is little to complain about in how banks treat their corporate customers, since in this case it seems the customer has the banks on the run. For example, on the lending side, the typical pricing differential is likely to exceed 80 basis points for small business customers compared with large corporates. And one banker who sat in on the briefings with Don Cruickshank says the former telecoms regulator seemed unconcerned about the corporate sector.
However, Martin Cross, banking analyst at stockbroker Teather & Greenwood, says there is a risk that large corporates will face a knock-on effect as the banks look for ways to pass on the extra consumer costs Cruickshank imposes on them. ‘But with multinationals, the banks are price takers and this will become more the case with extended use of the Internet,’ he adds. ‘This will permit inter-company settlement and the negotiation of terms more easily. Levying charges on bills of exchange, for instance, is a source of revenue at risk from the Internet.’
Angus Hislop, head of banking at PricewaterhouseCoopers, says that Cruickshank had a look at large corporate relationships to see if there was any evidence of ineffective competition. He found that corporates foster competition because they can bank anywhere in the world. ‘The conclusion was that large corporates use their bargaining power to obtain better deals,’ says Hislop. ‘Much criticism was directed at the payments system, but large corporates have access to the CHAPS system – in his view there was no impact on competition.’
Hislop says that the banking review comes out quite strongly against further mergers, not only amongst banks but in the financial services industry in general, including insurance companies and other providers. ‘In the short term this will keep a large number of players in the field and this is generally considered beneficial for competition,’ he says. ‘However, in the longer term, a fragmented industry could lead to foreign takeovers, with direct implications for the banks’ large corporate customers.’
The merger between insurers CGU and Norwich Union is an example of how financial services providers are playing the patriotic card. In the days leading up to the shareholders’ vote on the merger, Norwich Union’s chief executive Richard Harvey issued a veiled warning of what might happen if the two companies failed to create a national champion in the insurance sector. ‘We don’t want another Longbridge,’ Harvey said in a reference to the Rover plant under threat from BMW’s decision to sell its UK subsidiary. The BMW saga could indeed serve as an example of the potential implications of moving the decision-making power of a company away from its home country.
This holds true particularly for the smaller end of the large corporate market, where a company might have a single or multi-banking relationship exclusively with UK banks. Consider the hypothetical scenario of a £50m-a-year UK semi-conductor manufacturer whose prime banker is Abbey National. Over the next five years Abbey fails to agree a merger with Barclays or Lloyds TSB on terms that are acceptable to UK competition authorities against the backdrop of Cruickshank. In steps Commerzbank to hoover up Abbey, thumbing its nose at the Competition Commission, since the deal has the blessing of the EC. The British semi-conductor company suddenly finds it is dealing with a bank in which Siemens may be a major shareholder, in keeping with German banking practice. It is easy to imagine which of the two companies might obtain favoured financing terms.
Yet the big ticket players have great power in negotiating their terms of business. Typically, the likes of international operators such as ICI or British Gas can negotiate finer terms in their banking relationship by leveraging their multibank relationships. In fact, it is difficult to see how multinationals can fail to benefit from any attempt by UK banks to tighten the screws. ‘They can leverage these relationships,’ says Simon Whitehouse, a partner at Andersen Consulting. ‘Over the past ten to fifteen years, the lending services offered by banks have been eroded by disintermediation, with corporates going directly to the market to raise capital. Banks will make a special effort to maintain their corporate relationships. They are strategically important now, and will only become more so as value from the consumer and small business end is gradually crushed.’
On balance then, the Cruickshank report should bring cheer to corporates, and they should be looking to strengthen their ties with foreign lenders and financial services providers, so that, if the need arises, they are in a position to force attractive terms out of their UK bankers. l
Jules Stewart is a freelance journalist.