Thursday, February 18, 2010

Return of the traditional bank?

FT carries a profile of Handelsbanken, an old style Swedish bank, that is expanding in the UK branch by branch. It has 62 outlets as of today. Two things make the bank stand out:
  • Its belief in the traditional branch banking model, focused on the retail branch. This means key decisions are taken by branch managers, not by the central office, and customers contact the local branch, not some call centre.
  • Its belief in organic growth rather than growth by acquisition.
Its CEO, Per Boman, refutes any suggestion that the branch model is uncompetitive:
Conventional wisdom suggests such a bottom-up approach should be more costly to run than the standardised, mass market operations of bigger banks. Mr Boman insists that the opposite is true and points to returns on equity and cost-to-income ratios that compare favourably with peers. “It’s not branches that cost money, it’s the headquarters,” he says
There are lessons here for Indian banks. Many public sector banks have moved away from their
their branch model and towards centralised processing- in essence, apeing ICICI Bank. But ICICI Bank was a late entrant with limited branches and it needed to do something different to quickly attain scale. For PSBs to imitate this made little sense. Anyway, ICICI, under its present CEO, has declared that it will revert to a focus on branches. So what do PSBs intend to do?

Secondly, be extremely wary of growth by acquisition- a point I have made ad nauseum in this blog. Managing and digesting acquisitions is a tall order. It requires very high managerial capabilities, which many PSBs may not have. There is also profound truth in what Boman says about bank acquisitions:
“It’s more or less impossible to find a quality bank at a discount price. And we do not think bad banks are cheap enough.”


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