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Cost efficiency of leading European banks Global FSG study December, 2007 Arthur D. Little www.adlittle.de Executive summary Executive summary – Sustainable operational excellence is the driving Rule of the Game Europe’s most efficient banks Arthur D. Little has ranked 51 major European banks based on their efficiency level, as measured by their costincome-ratio Europe's most efficient bank is Spanish Banco Popular followed by Kaupthing from Iceland – On a country level, Iceland is the most efficient country followed by Spain and the UK. Also Sweden, Norway, Finland and Denmark are above the European average – The least efficient country among the 15 examined is Germany just behind Portugal and the Netherlands The top performing banks have some characteristics in common: – A will to always improve through hard work and innovation in order to bring maximum value to the customers – Very cost conscious cultures where cost efficiency and operational excellence are continuously encouraged. Cost cutting is especially focused to unproductive and non-value adding activities – High degree of straight-through processes, automation and typically investing heavily in IT – Flat hierarchies with short communication channels and a high degree of decentralisation with decision making primarily done on a local branch level – Use pragmatic list of key performance indicators, mostly numerical objectives for costs and efficiency – Driven by a varying market pressure and external factors such as the degree of consolidation in the market and internet penetration Source: Arthur D. Little analysis 2 Cost efficiency of leading European banks Table of contents 1 Introduction 2 Cost efficiency ranking 3 External factors 4 Top-performer analysis 5 Secrets of the top-performers 3 1 Introduction – Targets Arthur D. Little has ranked 51 major European banks based on operational excellence and cost efficiency FSG-Study: 51 European banks and their operational excellence Which are the most efficient European commercial banks? To answer this question Arthur D. Little has consolidated data and put together a ranking based on information from 51 major banks all over Europe To measure efficiency the cost-income-ratio is being used. The CIR is a standard key figure that is calculated by dividing the operational cost with total income, in other words it tells us how much a company spends in costs for every euro in income. This is an important ratio to use when measuring efficiency since an efficient company per definition uses less recourses than an inefficient one in order to earn the same amount of money The study also includes case studies of banks who are in top of the ranking showing how they have become so efficient Source: Arthur D. Little analysis 4 1 Introduction – Geographical distribution The selected 51 banks on the list are well distributed across Europe Overview Selection criterion: Nordic 11 banks – This means that the banks in the study not necessarily are the 51 largest in Europe since some of the banks that are the biggest in its own market might be relatively small in the European context United Kingdom 5 banks Benelux 7 banks Germany 4 banks France 4 banks Switzerland 5 banks Spain/Portugal 7 banks The largest banks as measured by total assets from each of the 15 different countries Austria 3 banks Italy 5 banks Banks from: – United Kingdom – Belgium – Germany – Austria – Spain – Sweden – Denmark – Iceland – – – – – – – France Netherlands Switzerland Italy Portugal Finland Norway Source: Arthur D. Little analysis 5 1 Introduction – The 51 banks divided by country of origin Banks from 15 different countries all over Europe have been studied Company Company Country Country Company Country Barclays PLC United Kingdom Danske Bank Denmark Bank Austria Creditanstalt Austria Royal Bank of Scotland United Kingdom Caixa Geral de Depositos Portugal Erste Bank Austria HSBC United Kingdom Banco Comercial Portugues Portugal Raiffeisen International Austria Lloyds TSB United Kingdom Banco Santander Spain Fortis Bank Belgium HBOS Group United Kingdom Banco Bilbao Vizcaya Argentaria Spain KBC Bank Belgium Kaupthing Bank Iceland Caja Madrid Spain Dexia Bank Belgium Glitnir Bank Iceland Banco Popular Spain DnB Nor Bank Norway UniCredit Group Italy Banco Sabadell Spain OP Bank Group Finland San Paolo IMI Group Italy SEB Sweden Sampo Group Finland Banca Intesa Italy Nordea Sweden BNP Paribas France Capitalia Italy Swedbank Sweden Crédit Agricole France UBI Banca Italy Sv. Handelsbanken Sweden Société Générale France ABN AMRO Bank Netherlands UBS Switzerland Credit Mutuel France ING Group Netherlands Credit Suisse Switzerland Commerzbank Germany Rabobank Netherlands Zürcher Kantonalbank Switzerland Deutsche Bank Germany SNS Bank Netherlands EFG Bank International Switzerland Dresdner Bank Germany Jyske Bank Denmark Raiffeisen Group Swit. Switzerland HVB Group Germany Source: Arthur D. Little analysis 6 1 Introduction – Total assets (million Euro) UBS is the largest bank in Europe followed by Barclays and BNP Paribas Rank Bank Country Total Assets Rank Bank Country Total Assets 1 UBS Switzerland 1 486 575 26 Credit Mutuel France 339 025 2 Barclays PLC United Kingdom 1 478 327 27 KBC Bank Belgium 325 400 3 BNP Paribas France 1 438 826 28 Banca Intesa Italy 291 781 4 HSBC United Kingdom 1 408 818 29 San Paolo IMI Group Italy 288 551 5 Royal Bank of Scotland United Kingdom 1 293 174 30 SEB Bank Sweden 214 257 6 Credit Agricole France 1 260 252 31 Sv. Handelsbanken Sweden 198 345 7 ING Group Netherlands 1 226 000 32 Erste Bank Austria 181 703 8 Deutsche Bank Germany 1 122 587 33 DNB Nor Bank Norway 160 799 9 ABN AMRO Bank Netherlands 987 100 34 Bank Austria Creditanstalt Austria 153 355 10 Societe Generale France 956 201 35 Swedbank Sweden 149 942 11 HBOS Group United Kingdom 877 223 36 Capitalia Italy 137 132 12 Banco Santander Spain 833 873 37 Caja Madrid Spain 136 952 13 UniCredit Group Italy 823 284 38 Caixa Geral de Depositos Portugal 96 246 14 Credit Suisse Switzerland 776 977 39 Banco Popular Spain Spain 91 650 15 Fortis Bank Belgium 773 235 40 SNS Bank Netherlands 79 742 16 Commerzbank Germany 603 293 41 Banco Comercial Portuges Portugal 78 707 17 Dexia Bank Belgium 566 700 42 UBI Banca Italy 73 873 18 Rabobank Netherlands 556 455 43 Banco Sabadell Spain 72 069 19 Lloyds TSB United Kingdom 509 978 44 Raiffeisenbanken Switzerland Switzerland 70 865 20 HVB Group Germany 508 000 45 Zürcher Kantonalbank Switzerland 59 182 21 Dresdner Bank Germany 497 287 46 Raiffeisenbanken International Austria 55 867 22 Banco Bilbao Vizcaya Argentaria Spain 411 916 47 Sampo Group Finland 46 946 23 Danske Bank Denmark 367 423 48 Kaupthing Bank Iceland 43 200 24 Nordea Bank Sweden 346 828 49 OP Bank Group Finland 24 192 25 Credit Mutuel France 339 025 50 Glitnir Bank Iceland 23 960 51 Jyske Bank Denmark 21 470 Source: Annual reports, Arthur D. Little analysis 7 Introduction – Total assets, company 1-25 Five of the 25 largest banks are British; Barclays, HSBC, Royal Bank of Scotland, HBOS and Lloyds TSB Ranking based on total assets 2006 Company 1-25 Total assets, €m 1 600 000 1 400 000 1 200 000 1 000 000 800 000 600 000 400 000 200 000 Source: Annual reports, Arthur D. Little analysis Credit Mutuel Nordea Bank Den Danske Bank BBVA Dresdner Bank HVB Group Lloyds TSB Rabobank Dexia Bank Commerzbank Fortis Bank Credit Suisse Banco Santander UniCredit Group HBOS Group Deutsche Bank ABN AMRO Bank Societe Generale ING Group Royal Bank of Scotland Credit Agricole HSBC BNP Paribas Barclays PLC 0 UBS 1 8 Source: Annual reports, Arthur D. Little analysis EFG International Jyske Bank Glitnir Bank OP Bank Group Kaupthing Bank Sampo Group Raiffeisenbanken Switzerland Zürcher Kantonalbank Raiffeisenbanken International Banco Sabadell UBI Banca Banco Comercial SNS Bank Banco Popular Caixa Geral de Despositos Caja Madrid Capitalia Swedbank Bank Austria Creditanstalt DNB Nor Bank Erste Bank Sv. Handelsbanken SEB Bank San Paolo IMI Group Banca Intesa KBC Bank 1 Introduction – Total assets, company 26-51 The smallest bank in the study is Swiss EFG International Ranking based on total assets 2006 Company 26-51 Total assets, €m 350 000 300 000 250 000 200 000 150 000 100 000 50 000 0 9 Cost efficiency of leading European banks Table of contents 1 Introduction 2 Cost efficiency ranking 3 External factors 4 Top-performer analysis 5 Secrets of the top-performers 10 2 Cost efficiency ranking – Methodology & top 10 51 banks have been ranked measured by their cost-income-ratio, most efficient is Spanish Banco Popular followed by Icelandic Kaupthing and Svenska Handelsbanken from Sweden Methodology The largest banks in 15 European countries have been included in the study, overall 51 banks The ranking is based on the banks’ cost-income-ratio (CIR) – The CIR is obtained by dividing operational cost including amortization and depreciation by total income – The data has been gathered directly from each company’s official annual reports and the ratio has been calculated by Arthur D. Little to obtain maximum comparability – To make the ranking less vulnerable to extraordinary events, the CIR used is an average of the ratios from three years; 2004 - 2006 – At the top of the ranking are the banks with the lowest cost-income-ratio i.e. the most cost efficient A country ranking has also been derived by taking the average CIR of the banks from every market Top 10 Rank Company Country 1 Banco Popular Spain 2 Kaupthing Iceland 3 Sv. Handelsbanken Sweden 4 Glitnir Iceland 5 HBOS UK 6 RBS UK 7 BBVA Spain 8 HSBC UK 9 Lloyds TSB UK 10 Caja Madrid Spain 11 Cost efficiency ranking – Ranking average cost-income-ratio 2004 - 2006 The average cost-income-ratio among the 51 banks is 59,2% Rank Bank Country CIR % 1 Banco Popular Spain 37,8 2 Kaupthing Iceland 3 Sv. Handelsbanken 4 5 Bank Country 26 Barclays PLC UK 60,0 39,3 27 Zurcher Kantonal bank Switzerland 60,3 Sweden 42,1 28 Raiffeisenbanken International Austria 60,5 Glitnir Iceland 43,7 29 Bank Austria Creditanstalt Austria 61,2 HBOS UK 44,7 30 6 RBS UK 45,0 31 7 BBVA Spain 46,4 Banca Intesa BNP Paribas 32 SNS Bank Italy France Netherlands 61,4 61,7 61,8 8 HSBC UK 51,4 33 Capitalia Italy 62,3 9 Lloyds TSB UK 51,5 34 Erste Bank Austria 62,3 10 Caja Madrid Spain 51,7 35 Credit Mutuel France 62,3 11 Swedbank Sweden 51,7 36 SEB Sweden 62,5 12 Dexia Belgium 52,7 37 Société Générale France 64,0 13 Sampo Group Finland 53,1 38 EFG International Switzerland 64,6 14 Danske Bank Denmark 53,7 39 Caixa Geral de Depositos Portugal 65,0 15 DnB Nor Norway 54,0 40 ING Bank Netherlands 65,8 16 Nordea Sweden 55,8 41 Commerzbank Germany 65,9 17 OP Bank Finland 55,8 42 Credit Agricole France 67,1 18 Raiffeisenbanken Switzerland Switzerland 55,9 43 Rabobank Netherlands 67,4 19 UBI Banca Italy 56,4 44 HVB Group Germany 67,6 20 Banco Santander Spain 57,6 45 Fortis Bank Belgium 68,4 21 KBC Bank Belgium 58,5 46 Credit Suisse Switzerland 70,6 22 Banco Sabadell Spain 58,8 47 UBS Switzerland 70,9 23 Unicredit Group Italy 58,8 48 Banco Comercial Portugues Portugal 71,1 24 San Paolo IMI Italy 59,4 49 Deutsche Bank Germany 74,9 25 Jyske Bank Denmark 59,9 50 ABN Amro Netherlands 76,2 51 Dresdner Bank Germany 85,7 Source: Annual Reports, Arthur. D Little analysis Note: Versus average (59,2%) Rank BELOW* ABOVE* 2 CIR % 12 2 Cost efficiency ranking – Ranking average cost-income-ratio 2004 - 2006 Some of the banks found in the lower end of the European ranking are however stars in their respective market Austria France Sweden Netherlands 1. Raiffeisenbanken International 1. BNP Paribas 1. SNS Bank 1. Handelsbanken 2. Bank Austria Creditanstalt 2. Credit Mutuel 2. ING Bank 2. Swedbank 3. Erste Bank 3. Société Générale 3. Rabobank 3. Nordea 4. Crédit Agricole 4. ABN Amro 4. SEB Belgium Germany 1. Dexia 1. Commerzbank 2. KBC Bank 2. HVB Group 3. Fortis Bank Norway 1. DNB Nor Iceland Denmark 1. Danske Bank 1. Kaupthing 2. Jyske Bank 2. Glitnir Italy 1. Raiffeisenbanken Swi. 2. Zurcher Kantonalbank Portugal 3. Deutsche Bank 4. Dresdner Bank Switzerland 1. Caixa Geral de Depositos 2. Banco Comercial Portugues 3. EFG International 4. Credit Suisse 5. UBS Spain UK 1. Banco Popular 2. BBVA 1. HBOS 1. UBI Banca 3. Caja Madrid 2. RBS 2. Unicredit Group 4. Banco Santander 3. HSBC 1. Sampo Group 3. San Paolo IMI 5. Banco Sabadell 4. Lloyds TSB 2. OP Bank 4. Banca Intesa Finland 5. Barclays PLC 5. Capitalia 13 2 Cost efficiency ranking – Country ranking The Top 10 banks are all from three different regions; the Nordics, United Kingdom and Spain Nordic United Kingdom Four banks in top ten position Three banks in top ten position – Kaupthing Bank – HBOS Group – Glitnir Bank – Royal Bank of Scotland – Sv. Handelsbanken – Lloyds TSB – HSBC Europe’s most efficient banks are all concentrated to three regions; Nordics, United Kingdom and Spain Central European countries such as Austria, Switzerland and Germany are overall performing worse than countries from the north and south of Europe The Mediterranean countries ranges from Spain in the top to Italy in the middle and France in the bottom of the ranking Spain Three banks in top ten position – Banco Popular Spain – BBVA – Caja Madrid Source: Arthur D. Little analysis 14 Cost efficiency ranking – Country ranking The country ranking has been obtained by taking the average CIR of the banks from each market, most efficient country is Iceland followed by Spain and the UK Country Average CIR % 1 Iceland 41,5 2 Spain 50,5 3 UK 50,5 4 Sweden 53,0 5 Norway 54,0 6 Finland 54,4 7 Denmark 56,8 8 Italy 59,6 9 Belgium 59,9 10 Austria 61,3 11 France 63,8 12 Switzerland 64,5 13 Netherlands 67,8 14 Portugal 68,0 15 Germany 73,5 ABOVE* Rank BELOW* 2 Source: Arthur. D Little analysis Note: Versus European average (58,6%) 15 Cost efficiency of leading European banks Table of contents 1 Introduction 2 Cost efficiency ranking 3 External factors 4 Top-performer analysis 5 Secrets of the top-performers 16 3 External factors – Internet penetration An external factor contributing to the efficiency of the Nordic banks is the high internet penetration in these countries which makes it possible to service a large share of the customers on-line Internet penetration vs. CIR Comments The Nordic countries, with Iceland and Sweden in the lead, are all in the forefront when it comes to internet usage in the world CIR % 80 75 Germany 70 Netherlan Switzerland ds Portugal France 65 60 Belgiu m 55 50 Spain 45 Austria Denmark Finland UK Sweden Norway Iceland 40 35 30 20 30 40 50 60 70 80 90 – The high internet penetration in these markets has pressured the banks to use the internet as a sales and transaction channel, and has vice versa made it possible for the Nordic banks to service a large share of their customers over the internet and thereby significantly reduce costly administration and human involvement Internet penetration in % Source: internetworldstats.com, globaltechforum.eiu.com, interviews, Arthur D. Little analysis 17 3 External factors – Outlet density The number of citizens per branch differs significantly between markets and affect the cost-income-ratio Citizens per banking outlet vs. CIR Comments Countries with relatively few outlets are in general performing better on the cost efficiency ranking than countries with a high density of branches CIR % 80 One reason is that many small branches makes it difficult to exploit economies of scale in an efficient way Germany 75 70 Netherlands Portugal France Switzerland Austria Italy Belgium Denmark Norway Spain Sweden 65 60 55 50 Finland UK – Branches are an expensive kind of distribution channel and in high density countries such as Germany and France the sales volumes per branch becomes simply to small to make each outlet really efficient causing CIR to increase Having relatively few branches is not contradictive to a decentralised organisation where decision making is primarily done on a local level 45 40 35 30 0 1000 2000 3000 4000 Citizens per branch 5000 6000 In Spain, the high branch density is compensated by an extremely efficient outlet network with a high degree of automation which for example has made it possible for Banco Popular to run their new branches with only three employees each Source: “Reaching out: Access to and Use of Banking Services Across Countries Beck, T., A. Demirguc-Kunt and S. Martinez Peria (2005), Spanish Bulls On A Run - Karina Robinson 1 April 2007 The Banker, Arthur D. Little analysis 18 3 External factors - Consolidation Differences in consolidation between markets is a factor that affects cost efficiency Consolidation There are large differences in the degree of consolidation in the banking sector between different markets in Europe – As illustrated in the plot to the right, Germany for example is an extremely fragmented market with one registered bank per 34 000 inhabitants reflecting a high number of regional and noncommercial banks, whilst in particular the UK and Spain are very consolidated markets with 178 000 and 213 000 citizens respectively per authorised bank Banking consolidation vs. CIR CIR % 100 CIR Switzerland Netherlands Portugal Germany Austria France Denmark Belgium Spain 50 Norway Sweden UK Looking at the plot, a negative correlation (although weak) between the degree of consolidation and the cost-income-ratio emerges i.e. consolidation drives cost-pressure 50 100 150 200 Citizens (1000) per registered bank Source: Association of German banks, Svenska Bank föreningen, Financial Services Authorities UK, Danish Bankers' Association, Association Française des Banques, Norwegian Financial Services Association, Swissbanking, Banco de Espana, Banco de Portugal, Osterreischische Nationalbank, Arthur D. Little analysis 19 3 External factors – Simulation Lowering the CIR of the largest German banks to the average European level through increased consolidation and internet penetration could mean potential lay-offs of every fifth employee Total workforce in Deutsche Bank, Dresdner Comments Bank, Commerzbank and HVB Group If the German banks were to reach the European average CIR, operational costs would have to be cut by at least 18% – Since the operational costs in the largest German banks to a large extent (61,5%) are made up of staff expenses a large part of the cost reduction would have to be achieved through lay-offs – Assuming that 61,5% of the total cost reduction would have to come from staff expenses means that the four largest banks in Germany potentially would have to cut their personnel costs by around 3 800 million euros which corresponds to more than 30 000 jobs or 20% of the total workforce – This would probably be a conservative estimation since other costs such as IT probably would have to increase some to compensate for the reductions in staff Another way out would be for the German banks to increase their productivity and generate more revenue with the existing workforce 180 000 30 00 0 140 000 100 000 60 000 20 000 Number of staff 2006 Number of staff in order to reach average European CIR – The most realistic solution is probably a combination between staff reductions and productivity improvements Source: Annual report, Arthur D. Little analysis 20 Cost efficiency of leading European banks Table of contents 1 Introduction 2 Cost efficiency ranking 3 External factors 4 Top-performer analysis 5 Secrets of the top-performers 21 Cost efficiency of leading European banks Table of contents 4 Top-performer analysis 4.1 Spain 4.2 Nordic 4.3 United Kingdom 22 4 Top-performer analysis – Spain – Summary No less than three Spanish banks make it to the Top 10 list Comments: BBVA #7 All the Spanish banks are investing heavily in advanced and innovative IT systems to improve both customer service and internal efficiency It is common in Spain that commercial units have to motivate the use of recourses with business cases to prove profitability and efficiency Banco Popular #1 Caja Madrid #10 Source: Arthur D. Little analysis The Spanish banks motivates and develops their staff through performance based salary and comprehensive training 23 #1 4 Top-performer analysis – Spain – Profile & Business approach Banco Popular has a strong customer focus in all of its businesses Banco Popular (Spain) Banco Popular was founded in 1926 Popular is a pure retail bank operating in Spain and Portugal with 4.3% and 2% market shares respectively Additionally to Popular's brand, the group has five regional banks in Spain Profile Total assets 2006: EUR 91,5 bn Net profit 2006: EUR 1 bn The main franchise is in SMEs, professionals and cards, with recent expansion in mortgages Banco Popular has always been a client-driven bank and it fosters customer loyalty, based on customer satisfaction. Its individual banking model was designed with personal banking, affinity groups and other segments with high binding levels in mind Business Approach The bank believes in offering a personalized service, giving advice, having credibility in the branch and ensuring customers find information easy to understand There is aggressive competition in the SME segment, in which Banco Popular is one of the leaders. Differentiation by product and service appears to be the key in achieving customer loyalty Source: Annual report 24 #1 4 Top-performer analysis – Spain – Why so efficient? Banco Popular has improved its cost efficiency by the use of state of the art IT solutions Why so efficient? Strong strategic focus on efficiency – One of Banco Popular’s three management criterions is; “systematic enhancement of efficiency” New IT platform (agreement with IBM signed in 2006) – Large savings in IT expected for the following years as a result of this Signed an agreement with Telefónica for the joint development of the “Branch 2010” concept – Telefónica takes responsibility of the QoS of the communications (fixed, mobile), the workstations, connectivity of the branch (LAN), and security – Technological evolution is guaranteed – In total 12 000 workstations on an outsourcing contract Focus on developing and motivating staff – Incentive structure where compensation is linked to performance through a large variable part of salary – Every employee has to go through at least 53 hours of training annually – “Because people move around, we want even our technology people to understand selling” – Roberto Higuera, CFO Banco Popular Organisational structure with a flat hierarchy that minimises bureaucracy Source: Annual report, interviews, Arthur D. Little analysis 25 4 #1 Top-performer analysis – Spain – Why so efficient? Banco Popular’s road to efficiency goes hand in hand with the transformation undergone by the Spanish financial sector during the last decades Booming economy IT & Automation Increased competition Consolidation Banking crisis The Spanish banking crisis in the 1970’s led to a restructuring of the banking sector and a reformation of the Spanish central bank New regulations and conditions led to a consolidation of the before very fragmented Spanish financial sector which made it possible to exploit in-country economies of scale and increase profitability Following the deregulation of the financial sector, foreign banks started to enter the Spanish market in the mid 70’s, forcing Spanish banks to start improve efficiency earlier than in many other countries Spanish banks started investing heavily in state-of-the-art technology which enabled them to increase the size of the business with less staff During the last couple of years Spain has become one of the fastest growing economies in Europe with a GDP growth of 3,8 % in 2006, 1,1 % higher than the Euro area. The increased demand and revenue following the booming economy has made it possible for Banco Popular to invest in efficiency improving measures Source: Western Europe: Spain - Spanish Bulls On A Run - Can Greater Efficiency Gains Be Made By Spain's Cost-effective Banks - And Will Their Forays Into Anglo- Saxon Markets Succeed? -Karina Robinson 1 April 2007 The Banker, Arthur D. Little analysis 26 #7 4 Top-performer analysis – Spain – Profile & Business approach BBVA has experienced a rapid growth in recent years and operates in 40 countries worldwide BBVA (Spain) BBVA was formed through the merger of Banco Bilbao Vizcaya and Argentaria in 1999 Profile The bank has recently focused on overseas expansion, and now operates in 40 countries. Like many other Spanish companies, it enjoys a dominant position in Spanish-speaking Latin American countries. It also has a presence in many Mediterranean countries, especially Portugal and Italy, and has announced its intention to expand into the United States and in Asia Total assets 2006: EUR 412 bn Net profit 2006: EUR 4,7 bn BBVA is one of Spain’s largest banks and operates under the universal banking model although focusing on retail and global wholesale banking Business Approach Source: Annual report At this stage the key growth driver for BBVA is Mexico and this should continue to be the centre of short/medium-term growth In Spain, BBVA is sensitive to the domestic macro and real estate sector trends and interest rates. However, the principal risk for BBVA is its strong dependence upon the American economy due both to the direct impact of its new acquisitions there and to its strong dependence upon the Mexican economy 27 #7 4 Top-performer analysis – Spain – Why so efficient? By linking salary to efficiency targets BBVA motivates its staff to work for cost reductions Why so efficient? Operational units (IT, Operations, HR, Facility mgmt, etc.) are the owners of the budget – Commercial units ask for resources and must show with a business case how they will use them and what the expected return is on the investment – Operational units have challenging objectives for cost reduction (e.g. IT plans to reduce costs by 20% in 5 years) BBVA has a strong presence in Latin America, with low costs and relatively efficient operations High proportion of variable salary (up to 50%) – Variable part depends on individual performance but also on unit and company results, with strong impact of efficiency objectives – Incentives for employees to purchase stock, so as to increase ownership feeling in the company Strong effort to re-design bank branches – No back office at the branch (regional centers carry out this function) – Early retirement of older resources (turning OPEX into CAPEX) – Efforts to migrate clients to alternative channels Immediately changing all the back office, IT, processes to BBVA´s when acquiring a new business – Support is global for all countries Source: Annual report, interviews, Arthur D. Little analysis 28 #7 4 Top-performer analysis – Spain – Why so efficient? To increase profitability and efficiency, BBVA reduced the number of middle level and central service personnel and increased its sales force during 2006 Transformation of staff composition during 2006 Nr of staff Middle level/Central service personnel Sales Staff 1 500 Comments To decrease its cost income ratio BBVA transformed its staff composition – The number of non value adding and unproductive middle level- and central service positions was heavily reduced by 750 people 1 000 500 – At the same time 1 000 new sales personnel were hired to increase revenue 0 -500 -1 000 Change in staff Although ending up with 250 more employees to pay in the end, cost efficiency was improved as staff was moved from unproductive to productive positions Source: Western Europe: Spain - Spanish Bulls On A Run - Can Greater Efficiency Gains Be Made By Spain's Cost-effective Banks - And Will Their Forays Into Anglo- Saxon Markets Succeed? - Karina Robinson 1 April 2007 The Banker, Arthur D. Little analysis 29 #10 4 Top-performer analysis – Spain – Profile & Business approach Caja Madrid uses an on-line virtual classroom for staff training Caja Madrid (Spain) The origins of Caja Madrid can be traced back to 1702 and a pawn broking institution founded by a priest named Francisco Piquer to help the poor get interest free loans Profile Caja Madrid has one of the largest distribution nets in the Spanish financial system with over 1 900 branches and 4600 advanced kiosks all over the country, main market being in the Madrid area with over 1 000 branches Caja Madrid is the fourth largest financial institution in Spain measured by total assets and employs around 13 000 professionals servicing approximately 7 million customers Total assets 2006: EUR 136,9 bn Net profit 2006: EUR 1 bn Offers a comprehensive range of products and services in retail-, investment- and private banking with complementary operations in insurance, asset management and brokerage and real estate Business Approach Well developed Internet banking business with more than 2 million private customers and 128 000 businesses doing their banking on-line All staff are assigned an own training plan to improve the competence level throughout the group, training is partly done on-line through the virtual classroom Social responsibility is emphasized in the business and is executed through the Obra social progamme and the Fundación that funds everything from children's education to assistance for elderly and environment protection etc. Source: Annual reports, company data 30 #10 4 Top-performer analysis – Spain – Why so efficient? Caja Madrid has during the recent decade continuously improved efficiency through innovative technology Why so efficient? Through a strategic plan called “Project 2006” with objectives which were to be reached in the end of 2006 Caja Madrid wanted to improve profitability, market share, quality and efficiency – During the three years of the project, Caja Madrid succeeded to lower its CIR by 6% – In the new “Project 2010” Caja Madrid has as an objective to outperform the other top Spanish banks in terms of efficiency A technology transformation process launched in 1998 has improved efficiency significantly – In 2006, a commercial planning system which helps managers in giving recommendations to customers was taken into action – A new pricing system improves coordination of pricing across the group – By automating the mortgage loan admission process total processing time has been cut by 70% – By integrating functions such as staff leave applications and request for transactions in the Intranet the internal administration has been reduced – Implementation of the "mobile office" concept for employees, giving remote access to corporate applications from PDAs and smartphones Through the “Zero paper project” Caja Madrid aims at eliminating the physical handling of documentation to reduce administration Through the “Improvement ideas programme” and the “Central services performance survey” Caja Madrid encourages its staff to come up with proposals and ideas on how to improve business and efficiency Source: Company web page, Annual report, Arthur D. Little analysis 31 #10 4 Top-performer analysis – Spain – Why so efficient? By linking a part of the compensation to performance, Caja Madrid motivates staff to work against higher cost efficiency and profitability Factors affecting the variable salary Total salary Company Performance Team performance Individual Performance Project Performance Comments In Caja Madrid staff compensation is divided in two parts; a fixed salary part and a performance related salary part including bonuses Caja Madrid uses a Results Evaluation System which takes into account performances on company-, team-, individualand project level and based on that data calculates each employee’s variable salary By linking salary to performance the bank wants to reward cost consciousness and strong efforts among the staff Variable salary Fixed salary Source: Company webpage, Arthur D. Little analysis 32 4 Top-performer analysis – Nordic – Summary The Nordic region, with Iceland in the forefront has three banks among the European top 10 Comments: Icelandic banks are in general very flexible and dynamic with quick and efficient decision making Kaupthing Bank #2 Glitnir Bank #4 Besides their internal efficiency the Icelandic banks are helped by a few external factors – A high internet penetration – A favorable business mix with a low share of retail banking, a large fraction of income coming from trading gains and a relatively high risk connected to the business Svenska Handelsbanken #3 Source: Arthur D. Little analysis – A geographical concentration of population in the home market All the Scandinavian banks are characterised by short communication channels and a flat hierarchy without bureaucracy which allows them to respond quickly to changes in the market 33 #2 4 Top-performer analysis – Nordic – Profile & Business approach Kaupthing has been growing rapidly in recent years, both organically and through acquisitions Kaupthing Bank (Iceland) Established 1982 in Reykjavik No 1 bank on Iceland with businesses and branches all over Northern Europe 2700 employees of which about 40% working on Iceland. Profile Total assets 2006: EUR 43 bn Net earnings 2006: EUR 0,98 bn Offers financial services to companies, institutional investors and high net worth individuals. Provides retail banking mainly on Iceland Business Approach Investment banking and corporate banking at the core of strategy with capital markets, asset management and private banking as complements Diversification, both geographically and in businesses. Sees Northern Europe as home market “Trumping bureaucracy“ to avoid slow and inefficient decision making Source: Annual reports, company data 34 #2 4 Top-performer analysis – Nordic – Why so efficient? Kaupthing has lowered its CIR by being dynamic and flexible with short communication channels and a flat hierarchy Why so efficient? Short communication channels leads to fast and efficient processes and lowers administration costs Flat organization and a culture of empowerment gives efficient and quick decision making. The idea is that slow and cumbersome decision making actually entails more risk by leading to missed out opportunities. The important thing is to be aware of the risk attached to every decision and never take on more risk than necessary Focus on cross-selling both between business units and countries to maximize profitability of every client contact Focus on profit before growth, although growing in a rapid pace both organically and through acquisitions the main focus when doing an investment always is on return and profitability. Within 18 months of an acquisition the target is to achieve a return on equity of at least 15% Disciplined risk-management through a balance, where risk is being controlled centrally but is based on reports from local risk managers in every market, a strategy which has helped Kaupthing to reduce the ratio of non-performing loans to loans to customers by more than 70% IT consolidation throughout the whole company allows information to be shared efficiently. Functional systems which are adjusted to fit the business and not the opposite Clear targets for profitability in every business which the business can be built around Source: Annual report, interviews, Arthur D. Little analysis 35 #2 4 Top-performer analysis – Nordic – Why so efficient? Kaupthing has succeeded to remain cost efficient while growing from a purely Icelandic bank to having operations in Northern Europe, USA and the Middle-East “We focus on growth and profitability“ – Peter Borsos, Head of communications, Sweden “Organic growth is a stronger force in Kaupthing Bank’s expansion and profit making than acquisitions.“ – Sigurdur Einarsson, Executive Chairman “Acquiring from a revenue synergy point of view rather than a cost cutting reason“ – Peter Borsos, Head of communications, Sweden Source: Interviews, Annual report, Arthur D. Little analysis 36 #2 4 Top-performer analysis – Nordic – Why so efficient? The Icelandic banks have a relatively high risk profile compared to the other banks in the Top 10 Moody’s current credit rating Comments The credit rating gives an indication of the risk associated with the business of each company Comparatively high credit rating indicating low risk Aaa Aa1 Comparatively low credit rating indicating higher risk Aa2 – The high risk linked to the Icelandic banks could explain how they have managed to combine a rapid growth with low costincome ratios – The future will tell if this is a sustainable strategy Aa3 Date of rating Lloyds TSB Banco Popular RBS SHB Dec 2006 Jul 2006 Oct 2007 Jun 2007 Source: Company data, Arthur D. Little analysis Caja Madrid N/A HBOS BBVA HSBC Glitnir Kaupthing Apr 2007 Jul 2006 Sep 2007 April 2007 May 2007 37 #3 4 Top-performer analysis – Nordic – Profile & Business approach SHB’s financial goal is to have a higher profitability than the average of its competitors Svenska Handelsbanken (Sweden) Svenska Handelsbanken was established 1871 in Stockholm and became a public company as early as 1873 which makes it the oldest company on the Stockholm Stock Exchange Today SHB is one of the four biggest banks in Sweden with a strong presence in the rest of the Nordic countries and the UK. In total 615 offices around the globe and over 10 000 employees Profile Total assets 2006: EUR 198 bn Net profit 2006: EUR 1,43 bn Provides services over the entire banking spectra; retail-, corporate-, investment- and private banking etc. SHB’s financial goal is “To have higher profitability than average of competitors” which is to be reached through higher customer satisfaction and lower costs Business Approach Emphasis on decentralisation with the local offices as primary business units responsible for the customers, supported by central specialist functions Top-ranked for customer satisfaction Source: Annual report, Company data 38 #3 4 Top-performer analysis – Nordic – Why so efficient? Cost efficiency is a highly integrated part in SHB’s corporate culture, all decisions are seen through a cost efficiency perspective Why so efficient? Cost-efficiency is the most central concept in SHB’s corporate culture and cost consciousness is encouraged throughout the whole organisation Wants to build long-term relationships between bank and customer to save money in the long-run, it’s much more expensive to attract new customers than keeping old ones Performance based compensation – Through its profit sharing program “Oktogonen” SHB sets of a portion of its profit every year which is to be shared equally among the staff of the bank, all under the condition that the bank has reached its financial goals – Oktogonen motivates staff to do their best to keep costs down and increase profitability to make sure that the bank reaches its targets Well established strategy for growth – Uses the same strategy and methods as in Sweden in as high degree as possible when entering a new market – Prefers to grow organically in well known mature markets to avoid high macro-risks – Doesn’t enter cities with less than 10 000 inhabitants Uses IT to minimize unnecessary administration and back office work which increases time available for customers and revenue generation Source: Annual report, Interviews, Arthur D. Little analysis 39 #3 4 Top-performer analysis – Nordic – Why so efficient? SHB‘s decentralised structure is built to achieve highest possible efficiency for each branch Features of the decentralised organisation Decision making Empowering Efficient decision making by keeping central involvement in business to a minimum Full empowering of local executives to build their branches in a way that fits their local market and needs Closeness to market Internal competition Closeness to customers resulting in short lead-time between identification of need in the market until implementation of solution Ranking of costincome-ratios between branches increases internal competitiveness Marketing Local marketing keeps the customer’s expectations in line with the capacity of each branch which in the end gives more satisfied customers Handelsbanken’s extremely decentralised organisation has proven to be very cost-efficient and at the same time resulted in high customer satisfaction Source: Interviews, Arthur D. Little analysis 40 #3 4 Top-performer analysis – Nordic – Why so efficient? By taking all credit decisions on a local branch level SHB avoids the traditional bureaucracy Traditional credit decision making National Level Regional Level Svenska Handelsbanken’s credit decision making Local/Branch Level Customer Text Text Local/Branch Level Customer By taking credit decisions on a local level where the customer is known, SHB has succeeded to both minimise administration and at the same time reduce its credit losses to an exceptionally low level Source: “Beyond budgeting” – Jurgen H. Daum 2002, Arthur D. Little analysis 41 #3 4 Top-performer analysis – Nordic – Why so efficient? By taking all credit decisions on a local branch level SHB avoids the traditional bureaucracy Traditional credit decision making Svenska Handelsbanken’s credit decision making National Level Regional Level Local/Branch Level Customer Source: “Beyond budgeting” – Jurgen H. Daum 2002, Arthur D. Little analysis Local/Branch Level Customer Comments In Svenska Handelsbanken all credit decisions are taken on a local branch level – Through this strategy SHB has succeeded to both minimise administration and reduce credit losses to an exceptionally low level Administration costs are lowered since each credit inquiry is handled only in one place instead of being sent around in the organisation, taking up both time and resources Credit losses are cut since the credit decision is taken by local staff who are the ones with the most knowledge about the customer and the best insight in local market conditions 42 #4 # 4 Top-performer analysis – Nordic – Profile & Business approach Islandsbanki changed its brand name to Glitnir as late as in 2006 Glitnir (Iceland) Formed in 2000 through the merger of Islandsbanki and FBA – The Icelandic Investment Bank. Changed its name from Islandsbanki to Glitnir in 2006 Profile Second largest financial group on Iceland with almost 1400 employees. Defines home market as Iceland and Norway with presence also in Canada, Denmark, China, Canada, USA, UK, Finland, Luxembourg and Sweden Total assets 2006: EUR 24 bn Net profit 2006: EUR 0,43 bn Core strengths are Capital market business, Investment management and Corporate finance Business Approach Has a unique expertise and focus on food industry (seafood), sustainable energy (geothermal energy) and off-shore supply shipping Expanding outside of Iceland to diversify business and reduce risk In the middle of a transition period with new brand name and organizational structure Source: Annual report, company data 43 #4 4 Top-performer analysis – Nordic – Why so efficient? Glitnir’s strategy in achieving cost efficiency is to focus on the revenue side rather than on the cost side Why so efficient? An explicit target of a CIR below 45% helps the company to keep its focus on cost-efficiency Focus is not on cost but on revenue and profit – The important thing is not the size of the cost, it’s the efficiency of the cost when it comes to revenue generating activities that matters – “We know we need to spend money to make money…but we are extremely disciplined about ensuring that what we invest in generates the maximum return for our investment” – “We just make sure the cost is effective in increasing the return on the investment at a much greater pace than the investment cost” – B. Kamallakharan, Executive director strategic growth Although a universal bank, business strategy is built around three unique niche areas, Seafood Industry, Geothermal Energy and Offshore Supply Vessels, in which Glitnir is the leading financial services provider in the world. Because of the bank’s enormous knowledge and experience in these areas the business processing becomes extremely efficient Time value of money, Glitnir is focused on providing services to customers faster than competitors which in addition to satisfying the customer also improves overall cost-efficiency for the bank Large part of income is related to trading gains which doesn’t drive costs in the same extent as interest or commission income Growth is driven by acquisitions of cost-efficient niche banks such as Finnish FIM Group and Norwegian BN Bank which has made it possible for Glitnir to grow without losing cost efficiency Source: Annual report, interviews, Standard&Poor, Arthur D. Little analysis 44 #4 4 Top-performer analysis – Nordic – Why so efficient? A relatively large part of Glitnir’s income is made up of trading gains which is a cheap but volatile income source Income sources GLITNIR Comments Glitnir has a relatively large part of income coming from trading gains which is a far less costly revenue base than interest income and fees and commission which most other banks (HBOS) are relying heavily on HBOS Trading gains Fees & Commission Trading gains Whilst resulting in low costs, a high dependence on trading gains also means more fluctuations in performance Fees & Commission Interest Income Interest Income “The very high level of profitability has been driven partly by trading gains…which are not sustainable over the long term” – Standard&Poor, Analyst Miguel Pintado Source: Annual report, interviews, Standard&Poor, Arthur D. Little analysis 45 #4 4 Top-performer analysis – Nordic – Why so efficient? Glitnir a strong business focus on three niche segments in which it is extremely efficent Why sohas efficient? “Glitnir has a strong business focus based on the seafood industry …The focused business strategy has enabled the bank to grow in its home markets and internationally while maintaining sustainable profit“ – Annual report 2006 “The bank has a strategy of focusing on 3 niches namely Seafood, Geothermal Energy and Offshore Supply Vessels. We are extremely efficient in processing these sectors as we know everything about them“ Glitnir builds its initiatives on its extensive and in-depth expertise in three global niche market segments: seafood, geothermal energy and offshore supply vessels – Bala Kamallakharan, Executive Director, Strategic Growth – Chairman and CEO statement, Annual report 2006 Source: Annual report, Interviews, Arthur D. Little analysis Source: Annual reports, interviews 46 4 Top-performer analysis The United Kingdom is represented by four banks in the Top 10 Comments: The British banks have improved their efficiency through a high degree of automation and large investments in state of the art IT systems HBOS #5 RBS #6 Both HBOS and Lloyds TSB have in recent years launched ambitious cost-reduction programmes with the aim to improve cost efficiency by cutting non-value adding costs such as administration and back-office HSBC #8 Lloyds TSB #9 Source: Arthur D. Little analysis HBOS, RBS and Lloyds TSB are all the result of mergers in recent years. This has opened up opportunities for costreductions and synergy effects which have improved costefficiency 47 #5 4 Top-performer analysis – UK – Profile & Business approach HBOS was formed through the merger between Halifax and Bank of Scotland in 2001 HBOS (UK) Established in 2001 through the merger between two of the most well known and oldest UK banks, Halifax formed in 1852 and Bank of Scotland founded in 1695. One of the largest financial services provider in the UK with 73 500 employees worldwide and a serious competitor to the Big Four; RBS, HSBC, Barclays and Lloyds TSB Profile Total assets 2006: EUR 877 bn Net profit 2006: EUR 5,6 bn Provides services in retail-, corporate- and business banking as well as insurance and investment services Business Approach Five strategic key elements to create value, most prioritized is to grow the UK business and the target is to achieve market shares around 15 - 20%. The other four elements include; Targeted international growth, colleague development, capital discipline and cost leadership The target is to achieve a cost-income-ratio of around 30% by 2010 Employee reward system strongly connected to performance Source: Annual report, company data 48 #5 4 Top-performer analysis – UK – Why so efficient? HBOS has a strong cost efficiency focus, aiming at cost leadership among its peers in the UK and having a CIR target around 30% to be achieved until 2010 Why so efficient? Cost-leadership among the UK banks is one of HBOS five strategic key elements – Cost-income-ratio target of around 30% to be achieved by 2010 – Cost leadership is going to be achieved not by reducing investments but through the reduction of unproductive costs – A programme launched in 2006 aims at reducing process and support costs with 430 million euros annually. This is going to be achieved by increased bulk buying and streamlining of IT systems, not by reducing the workforce or moving business to low-cost countries – Every division has explicit targets for how much costs are allowed to grow during the year, which for 2007 sums up to an overall Group cost growth of 7% Large synergy effects related to the merger between Halifax bank and Bank of Scotland in 2001which has enabled HBOS to lower cost base significantly Uses the same formula that has been successful in the UK when growing internationally Ended up in 8th place in the CIO100 list of the of the biggest users of IT in the UK, motivated by its comprehensive IT investments in back office, communications and storage which has led to large cost savings when administration and storing have been reduced Source: Annual report, interviews, Standard&Poor, www.cio.co.uk/cio100, Arthur D. Little analysis 49 #5 4 Top-performer analysis – UK – Why so efficient? HBOS ambitious CIR target for 2010 is to be achieved through a comprehensive cost reduction programme launched in 2006 Actual outcome vs. target and UK average CIR % 60 49 50 42,8 Comments Already achieved the strategic goal of being in cost-leadership among UK banks, HBOS uses the challenging 2010 target to motivate its staff and put focus on cost-efficiency – Reaching the 2010 target means cutting the cost-incomeratio by almost 13% in three years, a real challenge for an already efficient bank 40 30 30 20 – Crucial in the quest for costcutting opportunities is to keep focus on profitability and not engage in cost reductions which hurts core businesses and service level 10 0 Actual 2006 Source: Annual reports, Arthur D. Little analysis Target 2010 UK Average 2006 50 #6 4 Top-performer analysis – UK – Profile & Business approach Royal Bank of Scotland has more than 135 000 employees worldwide Royal Bank of Scotland (UK) Established 1727 in Edinburgh. Became one of the largest banks in the UK through the merger with National Westminster Bank in 2000 One of the largest financial services groups in the world with more than 135 000 employees all over the globe Profile Total assets 2006: EUR 1293 bn Net income 2006: EUR 9,3 bn Provides services in all areas of banking, divided in divisions; retail markets, corporate markets, RBS insurance, Ulster bank, Citizens and manufacturing A truly international bank with 42% of operating profit coming from outside the UK Business Approach Avoids sup-prime lending to reduce impairment losses and credit risk Developing a strategic partnership with Bank of China to get access to the rapidly growing Chinese market Source: Annual reports, company data 51 #6 4 Top-performer analysis – UK – Why so efficient? RBS has increased cost efficiency by the use of advanced IT systems which reduces administration and bureaucracy Why so efficient? All support functions are gathered in the manufacturing division. By using the same platform and standardized processes in all divisions, costs can be held down and the company’s purchasing power can be leveraged State of the art IT-systems providing new ways of collecting and distributing information – Advanced HR systems collects data on all employees and gathers it in one central database which allows local managers to access all kinds of information by a few clicks of the mouse, information which can then be used for quality improvement and benchmarking – Productivity and performance-management reporting tool (PIMMS) is a system which enables managers to compare the operational performance of different business units, get forecasts of workload demand for the coming months and get reports of the current situation in different operational units. This improves efficiency tremendously by allowing managers to make more informed decisions on the deployment of people to meet work demands – Implementation of modern marketing technology has allowed RBS to automate its B-to-C communications in all the traditional channels; direct mail, call centers, advertising and events. This has led to a better overview of marketing operations, lower operational costs and made more personalized marketing possible, all together leading to both higher efficiency and customer satisfaction Sound risk control made it possible to increase lending with 14% in 2006 while impairment losses increased by just 10% Source: Annual report, article “Pimms anyone? By Andy Job, Arthur D. Little analysis 52 #6 4 Top-performer analysis – UK – Why so efficient? All support functions in the RBS Group are gathered in the manufacturing division which services all customer facing divisions MANUFACTURING Business improvement Security and fraud Technology integration Retail Services operation Purchasing Technology Payment operations Property Retail markets Corporate markets RBS Insurance Ulster Bank Citizen By having all support functions in one place, large economies of scale can be achieved. The different functions and divisions are connected through advanced IT-systems which enables information to flow efficiently between different parts of the group Source: Annual report, interviews, Standard&Poor, Arthur D. Little analysis 53 #8 4 Top-performer analysis – UK – Profile & Business approach HSBC was founded in 1835 to finance trade between China and Europe HSBC (UK) The Hong Kong and Shanghai Banking Corporation was founded in 1835 to help finance the growing trade between China and Europe HSBC is one of the world’s largest financial institutions with more than 10 000 offices and 312 000 employees in 83 countries Profile Total assets 2006: EUR 1409 bn Net profit: EUR 15,7 bn HSBC provides a comprehensive range of financial services: personal financial services; commercial banking; corporate banking, investment banking and markets; private banking; and other activities Business Approach HSBC group operates in five regions: Europe; Hong Kong; the rest of Asia Pacific; including the Middle East and Africa; North America; and South America HSBC are made up of several entities which was gathered under one international brand name in 1999 HSBC operates under the slogan; “The worlds local bank” Source: Annual report, company data 54 #8 4 Top-performer analysis – UK – Why so efficient? HSBC is introducing self service terminals which enables customers to do their bank errands on their own Why so efficient? HSBC’s business follows five core principles of which two are closely linked to cost efficiency – Effective and efficient operations – Strict expense discipline One of HSBC’s strategies is to use its size and presence world wide to gain a competitive advantage over purely domestic players – By taking best practice solutions and innovation from different parts of the bank and transfer it throughout the whole group HSBC can improve cost efficiency and shorten time to market HSBC works continuously to streamline processes and increase automation – By the introduction of self service terminals a large share of the services previously done by branch staff can now be done by the customers themselves, reducing unnecessary administration – The Mexican entity is the first bank in the world offering pre approved online mortgages enabling customers to apply and receive loan details in just a couple of minutes using the internet – Using one common strategic internet platform for business clients worldwide gives economies of scale – The retail division in the UK has reduced its range of products by two thirds in two years, increasing efficiency in sales and distribution Source: Annual report, article “Pimms anyone? By Andy Job, Arthur D. Little analysis 55 #9 4 Top-performer analysis – UK – Profile & Business approach Lloyds TSB has a strategy of focusing on long term relationship with customers Lloyds TSB (UK) Created in 1996 through the merger of Lloyds bank, founded in 1765 in Birmingham, and TSB Bank established in 1810. One of the Big Four banks in the UK with more than 63 000 employees Profile Total assets 2006: EUR 509 bn Net profit 2006: EUR 4,2 bn Organized in three businesses; retail banking, insurance and investments, wholesale and international banking Business model is built around the creation of long-term relationships with customers Business Approach Engaging in a range of efficiency improvement programs to “enhance the service to our customers at a lower cost” Reduced its staff number by 6% during 2006 due to efficiency improvements Source: Annual report, company data 56 #9 4 Top-performer analysis – UK – Why so efficient? Lloyds TSB has increased efficiency by a cost reduction programme which included reducing staff by 6% Why so efficient? In the middle of a group wide productivity programme to structurally reduce cost base – Efficiency improvements in back office operations and increased automation of administration made it possible to reduce staff numbers by more than 4 000 or 6% of all staff in 2006 – Net benefits of programme is expected to be more than 350 million Euro annually in the coming years Focus on core markets which means leaving markets where the company has no competitive advantages or too low profitability Focus on building long term relationships with customers to maximize profit of every client meeting Efficiency is seen as a way to create room for further revenue generating and growth enhancing investments In the Retail banking division costs were reduced by 2% during 2006 in the same time as income grew by 4% Administration costs for telephone support has been reduced through the use of speech recognition technology lowering the need for human involvement in some areas Source: Interview, Arthur D. Little analysis 57 Cost efficiency of leading European banks Table of contents 1 Introduction 2 Cost efficiency ranking 3 External factors 4 Top-performer analysis 5 Secrets of the top-performers 58 5 Secrets of the top-performers Five different factors that affect cost efficiency can be derived from the top performer analysis IT Organisational structure Corporate culture Cost efficiency Targets Source: Arthur D. Little analysis Cost cutting 59 5 Secrets of the top-performers – Corporate culture In order to achieve a cost efficiency improving corporate culture, cost consciousness must be deeply integrated in strategy and encouraged throughout the whole business Top management has to show that they prioritise cost efficiency To make reality out of strategy, cost consciousness has to be encouraged throughout the organisation At HBOS, cost leadership among its competitors is one of five strategic key elements that works as a guide for the dayto-day business In BBVA and Caja Madrid large parts of salary are variable and depending on the accomplishment of different targets, many of them based on efficiency Svenska Handelsbanken’s financial goal is to have a higher profitability than competitors which is to be achieved through more satisfied customers and lower costs In Svenska Handelsbanken a part of the profit is put into profit sharing program Oktogonen, under the condition that the profitability target which is to be reached through low costs is achieved Banco Popular has “systematic enhancing of efficiency” as one of three management criterions Cost efficiency improving corporate culture Source: Arthur D. Little analysis 60 5 Secrets of the top-performers – IT A high degree of advanced IT systems improves efficiency both through lower costs due to less human involvement and through faster and more accurate processes Automation Speed & accuracy A high degree of automation makes it possible to lower costs by reducing expensive human involvement IT makes it possible to send information through a large organization and keep control over a multinational company with several divisions and operations worldwide By automation of administration and back office functions Lloyds TSB could reduce its total staff numbers by 6% At Svenska Handelsbanken an increased use of IT makes it possible for the staff to focus on revenue generating activities and time with customers By automating marketing functions such as direct mail and call centers RBS has been able to lower operational costs Source: Arthur D. Little analysis Efficiency With its advanced “Productivity and performance-management reporting tool” RBS managers has the possibility to reach benchmarking data from the whole group, forecasts of future workload and status on current projects which help them to make more informed decisions in a shorter period of time With the help of virtualisation technology HBOS expects major cost savings due to more efficient allocation of storage 61 5 Secrets of the top-performers – Organisational structure How the company is organised is crucial for its cost efficiency; flat hierarchy, shared support functions and decentralisation are common characteristics among the top performers A flat hierarchy with short communication channels reduces bureaucracy and administration Flat hierarchy & short communication channels At Kaupthing, slow and cumbersome decision making processes are seen as more risky than fast ones due to the risk of missing opportunities With its dynamic and flexible organisation Glitnir aims at providing services faster than its competitors both to satisfy customers and to lower its own costs By having support functions such as IT, HR and other expertise centrally the company can gain large economies of scale Shared support functions At RBS, all support functions are gathered in the manufacturing division, this gives the bank increased purchasing power and improves efficiency by avoiding sub-optimisation on divisional level that hurts the group as a whole A decentralised structure means that business decisions are taken as close to the market as possible Decentralised organisation By taking all credit decisions on a branch level Svenska Handelsbanken has managed to decrease its credit losses and speed up the processing at the same time – By letting the local manager design the branch, SHB makes sure that every branch fits its own specific market optimally Source: Arthur D. Little analysis 62 5 Secrets of the top-performers – Cost cutting When it comes to cost cutting it is crucial to cut the right costs, there has to be a balance between reducing the cost base and retaining revenue generation Focus should not be on cost cutting but on profitability At Glitnir the size of the cost is not as important as how efficient the cost is in generating revenue – The idea is that it “costs money to make money” and as long as the return is sufficient one should not be afraid of taking on costs Source: Arthur D. Little analysis When cutting costs, focus should be on unproductive and non value generating activities Both HBOS and Lloyds TSB have in their newly launched cost saving and productivity programmes focused on administrative and support functions when reducing costs 63 5 Secrets of the top-performers – Targets Explicit targets help the company to focus its efforts and motivates staff to work towards cost efficiency, among the top performers three targets on different levels are used By adopting a profitability target such as ROE, the company indirectly sets targets also for cost efficiency Profitability targets At Svenska Handelsbanken the financial goal is to have a higher profitability than its competitors. The way to reach this goal is by having more satisfied customers and lower costs. Although not explicit, the profitability target works as a cost efficiency target in the end A cost-income-ratio target puts focus on how to get as many units of income as possible out of every unit of cost and gives incentives to cut unproductive costs Cost-income-ratio targets At HBOS the cost-income-ratio target is used as a goal for its newly launched cost reduction programme and is not to be reached until 2010 Glitnir’s standing target for the CIR tells management if costs and income are in line with plan or not A cost growth target focuses solely on the cost side of efficiency and gives a clear signal to staff to hold down costs as much as possible Cost growth targets Source: Arthur D. Little analysis HBOS uses cost growth targets as a complement to the CIR target, which also emphasizes the income side. By having an explicit cost target, everybody knows how much costs are expected to grow and it leaves no room for unnecessary cost increases just because income is unexpectedly high in some period 64
