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MAPS COMMERCIAL DYNAMICS IN FINANCIAL SERVICES : 2001

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Table of Contents
Executive Summary
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This report covers: commercial dynamics in finance, changing market demands, leading UK banks and insurers, banking partnerships, remuneration of chief executives, chairpersons, mergers and acquisitions, sport-linked ventures, corpporate finance, credit cards, general banking services, motor insurance, general investment, unsecured personal loans, Unit Trusts ISA's. Online Banking, General Mortgages, Australia, France, Germany, The Netherlands, Republic of Ireland, Switzerland, US, CGNU,

Companies covered include: HSBC, Royal Sun Alliance, Barclays, Lloyds TSB, HBOS, Legal & General, Abbey National, HBOS, Alliance & Leicester,

Companies covered include: SITEL, Nortel Networks,THUS, Acxiom, Blue Pumpkin, Citel Technologies, Concerto Software, DTS Group, Mitel Networks, Nice Systems, Plantronics, Broadsystem, CJ Garland, Clientlogic, CPM United Kingdom, Harte-Hanks, Inkfish Call Centres, ISKY Europe, The Listening COmpany, MGT, MM Group, Capita, Jarvis,Serco, Vertex Data Science, Ventura,

TABLE OF CONTENTS

Executive Summary	1
Introduction	1
Competitive Pressures and Political Imperatives	1
Changing Market Demands	2
Technological
Opportunities	2
The Power of Brands	3
The Rise of Strategic Partnerships	3
1. Introduction	4
The topic	4
Objectives	4
Methodology	4
Original research	5
Problems in the Research Process	5
Definition	5
2. Strategic Overview	6
Leading UK Banks and Insurers	6
Pre-Tax Profits	6
Table 1: Leading UK Banks and Insurers Ranked by Pre-Tax Profits at Latest Reporting Year (£m and %), 2000	6
Figure 1: Leading UK Banks and Insurers Ranked by Pre-Tax Profits at Latest Reporting Year (£m), 2000	7
Pre-Tax Profits to Market Capitalisation	8
Table 2: Leading UK Banks and Insurers Ranked by Ratio of Pre-Tax Profits to Market Capitalisation at Latest Reporting Year (£m and %), 2000	8
Figure 2: Leading UK Banks and Insurers Ranked by Ratio of Pre-Tax Profits to Market Capitalisation at Latest Reporting Year (%), 2000	9
Table 3: Leading UK Banks and Insurers Ranked by Ratio of Pre-Tax Profits† to Market Capitalisation
(£m and %), 2000/2001	10
Figure 3: Leading UK Banks and Insurers Ranked by Ratio of Pre-Tax Profits† to Market Capitalisation at 6th July 2001 (%), 2000/2001	12
Pre-Tax Profits
per Employee	12
Table 4: Leading UK Banks and Insurers Ranked by Pre-Tax Profits†
per Employee (£m and £), 2000	13
Figure 4: Leading UK Banks and Insurers Ranked by Pre-Tax Profits† per Employee (£), 2000	14
Dividend Cover	15
Table 5: Leading UK Banks and Insurers Ranked by Dividend Cover† (pence), 2000	15
Figure 5: Leading UK Banks and Insurers Ranked by Dividend Cover†, 2000	16
Intangibles	17
Table 6: Leading UK Banks and Insurers Ranked by Increase in
Intangibles† (£m and %), 1999-2000	17
Figure 6: Leading UK Banks and Insurers Ranked by Increase in Intangibles† (£m), 1999-2000	18
Mergers	19
3. The Scramble
for Growth	20
International Dominance	20
4. Cost-Cutting Pressures	22
How to Reduce Costs	22
5. The Partnership Web	24
The rise of partnerships	24
Financial Services Partnerships Make Good Sense	24
Banking Partnerships	24
Other Companies	25
The Changing Web	25
Global Alliances	26
6. The Human Factor: Power in the Boardroom	27
High Rewards on
the Board	27
Remuneration of Chief Executives and
Chairpersons	27
Table 7: Remuneration of Chief Executives and Chairpersons of Leading Financial Services Companies in the UK (£), 2000	28
Across the Board Power	29
HSBC	29
Table 8: Major Directorships Held by Board Members of HSBC, 2000	29
Royal & Sun Alliance	31
Table 9: Major Directorships Held by Board Members of
Royal & Sun
Alliance, 2000	31
Royal Bank of Scotland	32
Table 10: Major Directorships Held by Board Members of
Royal Bank of Scotland, 2000	33
Barclays	34
Table 11: Major Directorships Held by Board Members of Barclays, 2000	35
The Co-operative Group	36
Lloyds TSB	36
Table 12: Major Directorships Held by Board Members of Lloyds TSB, 2000	37
Abbey National	38
Table 13: Major Directorships Held by Board Members of Abbey National, 2000	38
HBOS	39
Legal & General	39
Alliance & Leicester	40
7. Promotion and Advertising	41
Oeriew	41
The Double-Edged Effect	41
Sport-Linked Ventures	41
Mergers and Acquisitions	41
Marks and Spencer’s Indecision	42
Advertising Expenditure	42
Spending Increases	42
Table 14: Main Media Advertising Expenditure in the Principal Categories of Financial Services
(£000 and %), 1999/2000 and 2000/2001	43
Figure 7: Main Media Advertising Expenditure in the Principal Categories of Financial Services
(£000 and %), 1999/2000 and 2000/2001	45
A Year Makes a Big Difference	45
Corporate Finance	46
Table 15: Major Advertisers of Corporate Finance (£000 and %), Year to June 2001	46
Figure 8: Major Advertisers of Corporate Finance (£000 and %), Year to June 2001	48
Credit Cards	49
Table 16: Major Advertisers of Credit Cards
(£000 and %), Year to June 2001	49
General Banking Services	50
Table 17: Major Advertisers of General Banking Services
(£000 and %), Year to June 2001	50
Figure 9: Major Advertisers of General Banking Services
(£000 and %),
Year to June 2001	51
Motor Insurance	52
Table 18: Major Advertisers of Motor Insurance
(£000 and %), Year to June 2001	52
Figure 10: Major Advertisers of Motor Insurance
(£000 and %), Year to June 2001	53
General Investment
Schemes	54
Table 19: Major Advertisers of General Investment Scheme
(£000 and %), Year to June 2001	54
Figure 11: Major Advertisers of General Investment Scheme (£000 and %), Year to June 2001	55
Unsecured Personal
Loans	56
Table 20: Major Advertisers of Unsecured Personal Loans (£000 and %), Year to
June 2001	56
Figure 12: Major Advertisers of Unsecured Personal Loans (£000 and %), Year to June 2001	57
Accountants and Solicitors	58
Table 21: Major Advertisers of Accountants and Solicitors (£000 and %), Year to June 2001	58
Unit Trust ISAs	59
Table 22: Major Advertisers of Unit Trust ISAs (£000 and %), Year to June 2001	59
Figure 13: Major Advertisers of Unit Trust ISAs
(£000 and %), Year to June 2001	60
Online Banking	61
Table 23: Major Advertisers of Online Banking (£000 and %), Year to June 2001	61
Figure 14: Major Advertisers of Online Banking
(£000 and %), Year to June 2001	62
General Mortgages	63
Table 24: Major Advertisers of General Mortgages
(£000 and %), Year to June 2001	63
Figure 15: Major Advertisers of General Mortgages
(£000 and %), Year to June 2001	64
direct marketing	65
8. An International Perspective	66
INTRODUCTION	66
Australia	66
France	67
Germany	68
The Netherlands	69
republic of Ireland	70
Switzerland	70
US	70
9. PEST Analysis	72
POLITICAL FACTORS	72
ECONOMIC FACTORS	72
SOCIAL FACTORS	73
Demographics	73
Table 25: The UK Population by Gender and Age Group (million), 1901-1999 and
Forecast to 2026	74
Table 26: Ratio and Forecast Ratio of Over-60s to All Others in the UK Population, 1996-2026	75
Table 27: UK Population by Gender and Age (000), 1996-2026	75
The Rise of Lower-Income Customers	77
Technological Factors	78
WAP	78
Online Technology	78
10. Consumer Dynamics	80
A Bird in the Hand and a Foot in the Branch…
For Now	80
Confusion Reigns
among the elderly	80
Advance of Online
Banking	81
Who Loves a Call
Centre?	82
Savings Sink	83
Fewer Cards but More Credit?	85
Fewer Mortgages?	85
Pensions indifference	86
Insurance Doldrums	87
Flexible Accounts and Clearer Information	88
11. Company Profiles	89
Introduction	89
HSBC	89
Corporate Strategy	89
Advertising and
Distribution	89
Profitability	90
Table 28: HSBC’s Financial Performance (£m, pence and %), 1996-2000	90
Future Company Developments	91
Royal Bank of Scotland	92
Corporate Strategy	92
Advertising and
Distribution	92
Profitability	93
Table 29: Royal Bank of Scotland’s Financial Performance
(£m, pence and %), 1996-2000	93
Future Company Developments	93
Lloyds TSB	94
Corporate Strategy	94
Advertising and Distribution	95
Profitability	95
Table 30: Lloyds TSB’s Financial Performance
(£m, pence and %), 1996-2000	96
Future Company Developments	96
Barclays	97
Corporate Strategy	97
Advertising and
Distribution	98
Profitability	99
Table 31: Barclays’ Financial Performance
(£m, pence and %), 1996-2000	99
Future Company Developments	99
HBOS	100
Corporate Strategy	100
Table 32: Largest Mortgage Lenders in the UK (£bn), 2000	101
Advertising and
Distribution	101
Profitability	102
Table 33: Bank of Scotland’s Financial Performance
(£m, pence and %), 1996-2000	102
Table 34: Halifax’s Financial Performance
(£m, pence and %), 1996-2000	103
Future Company Developments	103
CGNU	104
Corporate Strategy	104
Advertising/Distribution	104
Profitability	104
Table 35: CGNU’s Financial Performance
(£m, pence and %), 1996 to 2000	105
Future Company Developments	106
Prudential	106
Corporate Strategy	106
Advertising and
Distribution	107
Profitability	107
Table 36: Prudential’s Financial Performance
(£m, pence and %), 1996-2000	108
Future Company Developments	108
Abbey National	109
Corporate Strategy	109
Advertising and
Distribution	109
Profitability	110
Table 37: Abbey National’s Financial Performance
(£m, pence and %), 1996-2000	110
Future Company Developments	110
Legal & General	111
Corporate Strategy	111
Advertising and
Distribution	111
Profitability	111
Table 38: Legal & General’s Financial Performance
(£m, pence and %), 1996-2000	111
Future Company Developments	112
Royal & Sun Alliance	112
Corporate Strategy	112
Advertising and
Distribution	113
Profitability	113
Table 39: Royal & Sun Alliance’s Financial Performance
(£m, pence and %), 1996-2000	113
Future Company Developments	114
Alliance & Leicester	115
Corporate Strategy	115
Advertising and
Distribution	115
Profitability	116
Table 40: Alliance & Leicester’s Financial Performance
(£m, pence and %), 1996-2000	116
Future Company Developments	117
Northern Rock	117
Corporate Strategy	117
Advertising and
Distribution	117
Profitability	118
Table 41: Northern Rock’s Financial Performance
(£m, pence and %), 1996-2000	118
Future Company Developments	119
Non-profit
Organisations	119
Consignia	119
Co-operative Bank	120
Bradford & Bingley	120
Friends Provident	121
National Savings	121
12. The Future	122
What about Customer Choice?	122
Limits to Foreign
Incursions	123
The Rich, the Poor, and
Those in the Middle who
Pay for Both	123
Where do Independent Financial Advisers
Fit In?	125
Ethics for the
21st Century	126
Who has the
Best Chances?	127
13. Glossary	129
14. Further Sources	131
Associations	131
Publications	131
General Sources	132
Bonnier Information
Sources	133
Government and Official Sources	134
Other Sources	134
Key Note Research	138
The Key Note Range of Reports	139

EXECUTIVE SUMMARY

INTRODUCTION

Commercial Dynamics in Financial Services is Key Note's analysis of the forces which are continually reshaping the financial services industry: competitive pressures and political imperatives, changing market demands, technological opportunities, the power of brands, and the rise of strategic partnerships. `Financial services' are cash management, savings, investments, loans, credit cards, mortgages, and long- and short-term insurances.

Competitive Pressures and Political Imperatives

HSBC is the UK's biggest bank. Its profits in 2000 dwarfed those of all other banks in the UK. Lloyds TSB, Barclays and Royal Bank of Scotland follow HSBC in terms of pre-tax profits. The banks fared much better than the insurers in 2000: long-term insurance was hit by the public's reluctance to invest in pensions and endowments because of falling returns, and general insurance was hit by rising claim values. Royal & Sun Alliance, for example, achieved a marginal profit, and CGNU posted a huge loss.

The Government halted Lloyds TSB's £17bn hostile bid for Abbey National, on the grounds that the takeover would be against public interest. The decision has far-reaching implications for domestic banks and insurers: during the lifetime of the current administration, `public interest' is likely to prevent any mergers which concentrate more than around a quarter of any market in the hands of one company. Increasingly, therefore, companies will look to expand abroad. Lloyds TSB and Barclays both earn over 85 percent of their profits in the UK, and in recent years have grown by acquiring UK organisations, a process that will be difficult to continue because of the concentrated nature of UK financial services. Halifax and Bank of Scotland are expanding through a merger with each other, but when this is accomplished, further growth by acquisition or merger will be hard to come by. Further details and figures are given in Chapter 2 - Strategic Overview, and Chapter 11 - Company Profiles.

The leaders of the UK's financial services industry are extremely well rewarded, especially at HSBC, Barclays, and Royal Bank of Scotland. Shareholders are trying to exert more control over salaries, bonuses and fees. Typically, chief executives of large financial companies received well over £500,000 in 2000. Further details are given in Chapter 6 - The Human Factor: Power in the Boardroom.

Overall weak growth, and a continued decline in manufacturing, are likely in the UK during 2001 and 2002. Rural industry is suffering from the impact of foot and mouth, exports to Europe are costly because the pound appreciated against the euro, and worldwide falls in share prices make corporate and private investors feel less wealthy. Less wealth means less demand for most financial services, with the exception of secured and unsecured credit. This is an important point for banks and insurers generally and, in particular, for those that are homing in on wealth management, including HSBC, Lloyds TSB and Barclays. Property should be more popular with the public than equity-based investments, until stockmarkets have settled down.

Between 1996 and 2026, a fall of 7.5 percent in the 30 to 44 prime working age band is expected, while there could be a rise of 76.6 percent in men aged 75 and over, and over 33 percent more women aged 75 and over. The forecast increases in the over-90s are even more striking: a near trebling of men over 90, and a rise of 57.5 percent in women nonagenarians. The elderly represent a substantial new market for financial services, especially for schemes to augment pensions. Further details are given in Chapter 9 - PEST Analysis.

Changing Market Demands

The early UK entrants in the `senior citizens' market were mainly foreign: NPI, owned by AMP of Australia; GE Life, part of General Electric of the US; Sun Life, part of the French AXA group; and Cornhill, part of Allianz of Germany. It is surprising that these companies were so much quicker than most domestic companies to see a market opportunity. In the important personal pensions sector, the bombshell dropped by Equitable Life on 16th July 2001 - when it slashed its with-profits funds by 16 percent - is likely to have far-reaching repercussions. This serious example of dashed expectations is likely to reduce public interest in stakeholder pensions, for which the Government so much wants the majority of adults to save. The Government now needs to rethink. Some form of state guarantee is required to underpin savings for personal pensions.

The increasing financial pressures on `middle Britain' may translate into a new demand for mutuals and co-operative organisations. The Nationwide, the Chelsea and the other surviving building societies all emphasise the advantages of mutuality for customers.

Banks that invest in environmentally dubious projects, such as oil drilling in Alaska, or tree clearance in the Amazon basin, will face more critical public scrutiny. The ethical indices, FTSE4Good, launched in London in July 2001, are a significant move, because they reflect public worries about investments that could harm people or the environment.

Further explanations of all these issues are given in Chapter 12 - The Future.

Technological Opportunities

Customers are getting used to the disappearance of branches, and are quickly accepting online banking - except the less affluent. Call centres need improvement because they are often not at all user-friendly. The elderly, especially, often find product information confusing, so it would be a good idea for companies to present essentials in clearer language. Consumer research indicates that insurers will have difficulty in expanding the domestic market profitably, and that huge damage has been done to the pensions business. Flexible all-in-one accounts, which can link cash, mortgages and personal loans, have very quickly become popular. Credit and credit management will remain growth sectors, as customers prefer today's tangibles to tomorrow's uncertainties. Further details are provided in Chapter 4 - Cost-Cutting Pressures, and Chapter 10 - Consumer Dynamics.

The Power of Brands

Mergers and acquisitions create branding problems. HBOS (Halifax Bank of Scotland) is very similar to HSBC (Hong Kong & Shanghai Banking Corporation). Royal & Sun Alliance is perhaps too long a name to retain, as is CGNU which has now opted to use the respected Norwich Union brand in the UK. Barclays has so far retained the Woolwich brand, and Royal Bank of Scotland has kept National Westminster. The use of multiple brands gives the public an illusion of choice, because only those who closely follow the financial news can really appreciate who owns whom. Brand development is becoming a big headache because of fragmentation of promotion channels, audiences and messages. The straightforward advertisement has lost its impact.

Brand development now needs to be integrated across many channels in order to build and reinforce the message. Further details of brand development and multiple brands are given in Chapter 7 - Promotion and Advertising.

The combination of branch closures and the growth of call centres suggests that staff are now more remote from customers. The growing lack of familiarity between staff and customers results in the rise of control measures which can reduce customers to a set of numbers. Companies which are keen to rebuild links between staff and customers include Bradford & Bingley, with its financial advisers; Abbey National with the coffee-shop-bank concept; and Alliance & Leicester with its `movingimproving' finance shops. These former building societies appear closer to customers than the big banks do. Chapter 4 - Cost-Cutting Pressures gives more details.

The Rise of Strategic Partnerships

Partnerships enable companies to expand without creating obvious monopolies. In May 2001, five banks from five nations - Barclays of the UK, Deutsche Bank of Germany, Bank of America, Scotia Bank of Canada, and Westpac of Australia - joined forces to create a global ATM (automated teller machine) alliance, so that 36 million customers can take out cash, without being charged, from 23,000 ATMs. Partnerships have been used with notable success by Royal Bank of Scotland, helping to make it into an international bank, and by Bank of Scotland, to maintain its status as a leading national bank. Chapter 5 - The Partnership Web discusses partnerships in greater detail.

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