Cost efficiency of leading European banks

Transcription

Cost efficiency of leading European banks
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
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#8
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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
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#9
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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
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#9
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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
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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
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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
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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
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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
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