Recent events would suggest all is lost in Yorkshire financial services – after many decades of gains. But Peter Baber finds it’s not as simple as that.
In the very recent past, anyone asking about financial services in Yorkshire would have seen a sector that was confident in its strength.
As Steve Williams, head of Deloitte’s northern financial services practice, says,: “Until the past couple of weeks we have certainly been seeing a steady increase in employment here, and even without investment banks there are still good quality jobs for graduates.”
The trouble is, as he says, that was until a few weeks ago. Before the credit crunch finally hit home, and HBOS was swallowed up – or at least at the time of writing looked very likely to be swallowed up – by Lloyds TSB, and Bradford & Bingley saw itself either disappearing into Spanish bank Santander, fresh from devouring Alliance & Leicester, or running to the government for support.
It’s true, the credit crunch has not only just struck: its effects have been felt for many months, in good part causing HBOS and Bradford & Bingley to launch rights issues whose failure ultimately led to their downfall.
But the “collapse” of these once-venerable Yorkshire institutions has brought home to the general public just what is at stake here, with rumours of a possible 110,000 job losses (across the UK admittedly) resulting from these two stories alone.
There is already alarm that Yorkshire could bear the brunt of these job losses, not least because we have a Scottish prime minister, a Scottish Chancellor, and the Scottish part of the the HBOS organisation was a bank that many Scots consider their equivalent of the Bank of England – particularly as it had authority to issue its own notes. “We have already seen the Scottish card being played,”says Mark Hannam, head of financial services at PricewaterhouseCoopers in Yorkshire, “and no commitments about what will happen south of the border.”
If the axe did fall heavily in Yorkshire – and Lloyds was quick to deny rumours that it has already appointed property agents in Yorkshire to dispose of property – it would be a serious blow. Figures compiled by the lobbying organisation the Leeds Financial Services Initiative (LFSI) indicate that 298,000 people work in the financial services in the wider Leeds city region, while it accounts for 34 per cent of the workforce within the city of Leeds.
That certainly comes as no surprise to Martin Allison, who was regional director at the Royal Bank of Scotland for 17 years until the early part of this decade.
He has specific reasons for why so many call centres should have been set up in the region. “People looked around for locations because they didn’t want everybody to be based in London,” he says. “They wanted somewhere that had a workforce with accents that may be considered acceptable to a wider public, and the North East, Yorkshire and southern Scottish accents were certainly viewed as that. It certainly fuelled call centre development.”
And he says a distinct pattern emerged where there was a proliferation of investment banks in London, pension funds in Edinburgh, and, with the exception of Bradford & Bingley and what was the Halifax, largely mutual building societies across Yorkshire. That would appear to bear up in figures: three of the top ten remaining mutuals – the Yorkshire Building Society, Leeds Building Society and Skipton Building Society – are all based in Yorkshire.
Others agree with Allison about the nature of the banking that gets done here, too. “Is it a back office operation?” says Hannam. “Not in terms of some retail operations having head offices here, such as the Skipton and Yorkshire Building Societies. The building society sector has grown from the growth in the property sector, and people wanting to deposit their money.”
But, equally, they say it would be wrong to make any claim to Yorkshire being a powerhouse for investment banking. If that happens anywhere in the north, it tends to be Manchester, largely because of its airport from which managers at largely US-owned investment banks can fly straight home. “It’s true we have relatively few people actually managing funds, and to some extent that matters,” says Hannam.
Bob Smalley, corporate banking manager at HSBC in Leeds, also admits that, while the growth in financial services in Yorkshire has been impressive, we are not yet vying on a global scale with London. Still, he, who has been working in Yorkshire since 1985, and Hannam, who only moved here a year ago from Edinburgh, are impressed with what they have seen.
“Previously I thought that when you talked about financial services everyone would think of London, and most people would come up with Edinburgh,” says Hannam. “After that possibly Bristol, Birmingham, the North West and only then Leeds. But it is only when you come to Leeds that you really appreciate just what a large financial services industry operates from here.”
The industry is being supported by the likes of the LFSI, which has been campaigning to raise the profile of the industry in Yorkshire, and won a grant of nearly £3m from Yorkshire Forward to boost its efforts.
While some are still claiming this is relatively paltry compared with other parts of the country – and here again there are envious glances across the Pennines to Manchester – the organisation has been active, using an event in London to set up a club of ‘ambassadors’ who used to work in the Leeds financial sector and are willing to sing its praises worldwide.
LFSI chief executive John Ansbro admits that while London will always be there, Leeds should still fight its corner because “if we didn’t the UK would lose out on providing products that are too expensive to produce in London”. These would include public/private partnerships, he says. So it’s no surprise this is one area of Leeds expertise the LFSI is heavily promoting at this month’s Leeds in Milan event.
So is all this good work likely to be jeopardised by what has happened at HBOS and Bradford & Bingley?
Ansbro says it would be foolish to assume Yorkshire’s profile will not take a knock, and Allison is furious much of this should have come about as the result of a small group of people short-selling on the shares of such organisations.
“It is an interesting phenomena that unregulated parties – in other words hedge funds – should have been allowed to invest in the ownership of what is one of the most strongly regulated sectors in the UK economy,” he says.
He has little time for the argument that these investors were only exposing the weaknesses in organisations that relied so heavily on interbank lending.
Whatever the reason, Williams at Deloitte says practical considerations must come to the fore. “The biggest danger is what’s going to happen to the head office function,” he says, “particularly if they start consolidating operations that have head offices in Yorkshire.”
Lloyds TSB would only say it was far too early to say anything about what might happen, but a significant hit to Yorkshire prestige is a worry for central government. That is why Rosie Winterton, minister for Yorkshire, has been holding meetings with Sir Victor Blank, chairman of Lloyds TSB, Yorkshire Forward and the LFSI over the future employment prospects for staff at HBOS and Bradford & Bingley.
A special committee has been set up with Yorkshire Forward chairman Tom Riordan to look into similar issues. Even if Allison thinks this is three years too late, staff at these organisations are likely to get a sympathetic hearing from Riordan. Earlier this year he told Insider how shocked he was to hear that Bradford & Bingley’s ousted chief executive Steven Crawshaw had been badgered to take more risk and move even more into sub-prime lending – often by the people who are now so eager to castigate such activity as recklessness.
So far the only guarantee has come from the government – that no jobs will go at Bradford & Bingley for at least six months. But a source close to the discussions told Insider Bradford & Bingley could end up being the worst off at the end of all discussions.
HBOS and Lloyds TSB, the thinking is, complement each other: one is strong in areas where the other is weak. Bradford & Bingley, on the other hand, is “just” a mortgage business.
Certainly David Forbes, director of NM Rothschild’s office in Leeds, doesn’t think the Lloyds TSB/HBOS deal is quite as gloomy as people are making out. “It’s not a bad fit,” he says. “Lloyds is strong in retail, while Bank of Scotland is strong on the corporate side. It’s not necessarily bad news for employment either because Halifax was, and still is, the headquarters of HBOS’s building society operation, not its banking operation, and the Halifax building society operation has always been a much bigger operation than Cheltenham & Gloucester, which is owned by Lloyds TSB.
“If I were a building society worker I would be more worried if I was in Cheltenham because it’s probably much more likely that will be merged into the Halifax operation.”
There does remain the question of what will happen with senior management at the firm, particularly HBOS’ chief executive Andy Hornby, the wunderkind who was appointed to the post at the age of 38, and is best known for having come top in his year at Harvard Business School, or, according to some analysts’ notes that were rather embarrassingly re-aired at the time the merger was announced, for being “good looking”.
Although it looked initially like many of the senior managers would be offered senior positions in the newly merged organisation (and would stand to gain millions from the sale of their shares, much to the disgust of some in the street), many professional advisers Insider spoke to still think Hornby will be “casualty number one”.
When Radio Four’s Today programme wheeled in former Lloyds TSB chairman and chief executive Sir Edward Pitman to discuss the deal when there was signs of wavering, he spoke of the need to get back to ‘basic banking’ and cast aspersions on banking organisations that had been run by people who “didn’t know anything about banking”.
He said he was referring to Adam Applegarth, former chief executive of Northern Rock. But Pitman could just as easily have been referring to Hornby, who joined HBOS at the top after a career spent largely in retail, with the odd attempt here and there to get into private equity.
But who really is to blame for the uncertain predicament the industry finds itself in? Is it possible to go back to all the demutualisations that took place in the 1990s and say they were a mistake?
Adam Bennett, a partner at Addleshaw Goddard, whose practice has advised 35 of the 59 mutual building societies left, says that would seem to be the position of the Building Societies Assocation. “They would say that, but look at the ones that did demutualise, apart from HBOS and Bradford & Bingley,” he says.
“Where are they? They have all disappeared. It may not be a problem for their customers, but is it good for UK plc? I don’t think so.”
He says the problem lay in what the demutualised organisations chose to do almost as soon as they demutualised. “Too many of them went down the same business model that Northern Rock took,” he says, “and relied on wholesale funding. So it was inevitable that when that dried up they would have difficulties. In contrast, the mutual building societies still have on average 70 per cent of their funds from individual savings.
“The wholesale funders of HBOS were getting jittery, partly because of the credit crunch and partly because of their perception about how safe HBOS was. With the falling housing market HBOS was bound to be vulnerable as it was the former building society that was seen as the most linked in with the housing market.
“With Bradford and Bingley, as soon as it demutualised it went out to the wholesale markets. No wonder some rating agencies had it as a junk bond. They took on a lot of buy-to-let loans, and much of GMAC’s mortgage book. But in a recession it is always more likely the payment of buy-to-let mortgages will slip, rather than people’s primary residences.”
That view is not quite shared by John Carrier, however, who is retiring in December after 16 years at chief executive of the Scarborough Building Society. Carrier was at the top of his organisation when many other building societies demutualised. The board considered following suit, he says. “But we took the view that the business model of being a mutual is one that suited our organisation.”
He says he was never jealous of the new and opportunities that demutualisation gave to his counterparts at some of the other organisations.
But, even though his organisation relies for 80 per cent of its funds on deposit savings, he is also charitable in not wishing to cast any blame. Each decision taken was different, he says, and very much up to the board of directors, and no-one could have predicted how the past 14 months were going to pan out, he says.
“These really are exceptional circumstances. We could probably all wish we had a crystal ball.”
Looking into the future, what else can we expect in store for Yorkshire financial services?
Bennett says even within the mutual sectors, further consolidation, particularly in light of the Derbyshire and Cheshire joining in with the Nationwide, is likely. “There are smaller ones like the Barnsley and Beverley that may be swallowed up,” he says.
Given the current climate and customer’s flight to safety, consolidation may very well be the name of the game in other areas, too.
Paul Dickson, partner at Armstrong Watson, has been noticing it among the smaller IFA sector, and not just because of economic turmoil. “Smaller firms have been finding it harder to operate with legislation becoming even more complex. We, too, have had to grow: we took over Milner Booth, based in Leeds, and have taken over small firms in Hexham.”
But it has to be said, once all the major operations are accounted for, those involved in the more business end of transaction banking, while funding it tough, do not necessarily see a doomsday scenario ahead.
“It has been business as usual for us,” says Smalley at HSBC. “We have grown in the past six months. We have recruited and are growing our team. The economy is going through a tough time, but we are also still in the very early days after the announcement of the merger between HBOS and Lloyds. We have certainly not seen a significant increase in people who bank with Bank of Scotland coming to talk to us.”
Similar guarded optimism is taken up by Lee Collinson, corporate director at Barclays Commercial’s north of England team.
“Is it tough? Of course it’s tough,” he says. “I’ve been in banking for 20 years, and this is one of the most difficult times I can remember. But we have opened an office in Hull, returning out commercial bank there, and we are still doing deals.
“In the past couple of months we have led on two deals that involved £100m in debt. As for what 2009 will bring, who knows? But we will get through it.”
The future of financial services in Yorkshire, it seems, depends largely on where you are.