RBS, GRG and the reasons why small firms couldn't borrow

TWO reports about banking have emerged blinking into the daylight in the past few days and neither makes for pretty reading.

One is entrepreneur Lawrence Tomlinson’s sorry tale about the way a restructuring division of Royal Bank of Scotland, known as GRG, allegedly elbowed viable businesses down a slippery slope into failure which ended with another bank subsidiary, West Register, making a tidy profit on the sale of property assets.

Quite rightly, this grubby episode is now under investigation, and one of the cases the probe would do well to dwell on is the way Kevin Riley’s River Crescent apartment development on the banks of the Trent in Nottingham ended up in administration.

Despite the lurid headlines, it’s actually the other report which matters more. Sir Andrew Large’s ‘RBS Independent Lending Review’ looks at RBS’s lending to SMEs before and after the credit crunch and goes a long way towards explaining why small firms have found it hard to get finance since 2008.

RBS/NatWest isn’t the only bank in the SME lending market and I suspect others will have had similar issues. But it is the biggest player and the failings outlined by Sir Andrew lift the lid on why the problem has occurred.

There isn’t room to cover all the findings of a 36-page report here, but it’s worth dwelling on some of the detail.

For starters, it’s important to understand that lending to small firms shouldn’t go back to pre-crisis proportions for two reasons.

One is that before the crisis they were given too much money. It’s now estimated that by 2009 UK banks in total had loaned as much as £30 billion more than the sector was really capable of repaying – a situation which has now been thrown into reverse, with as much as £35 billion too little since.

In between the two lies what should be a prudent level of SME lending – a total stock of bank lending of around £200-210 billion.

The reason why lending ballooned out of control in the run up to the crunch lies in lax lending policies. In some cases, RBS agreed loans not because of a borrower’s trading performance but because the business owned collateral in the form of a property asset which was rising in value. On that basis, many loans were doomed to failure.

Even after the credit crunch hit and the bank ran into trouble, it didn’t pull the shutters down. In 2009 it had budgeted for a substantial amount of SME lending – but it couldn’t get the money out of the door because of a mix of its own turmoil and an economy which was in no fit state to absorb it.

Unsurprisingly, RBS has since taken some fairly drastic action to try to repair both its balance sheet and the way it operates lending. What may surprise us that some of this drastic action appears astonishingly basic.

RBS acknowledges that in the run-up to the crunch it had casually waved goodbye to experienced relationship managers which hindsight demonstrates it sorely needed. While some wise heads remained, others were ill-equipped to understand businesses or industry sectors and driven by incentives which skewed the decision-making process.

So, RBS has since introduced a training and accreditation programme for relationship managers, including a professional qualification.  But didn’t it have one before?

Similarly, it’s changed the lending criteria, the process for very small businesses beginning with a basic affordability test followed by the kind of credit scoring that routinely goes into a personal loan. For bigger customers the relationship manager can make some delegated decisions, but those that fail his scorecard criteria or go beyond his financial authority are referred to a credit officer who puts smaller, straightforward applications through a data template or bigger, complex ones through a bespoke process.

Finally, its commercial banking operation now includes people with specialist knowledge of certain industry sectors. Again, why on earth wasn’t this standard practice anyway?

Sir Andrew’s report makes clear that since the credit crunch RBS appears to have sorted out all its internal problems. The problem, though, is that this hasn’t translated into more lending – and surveys show that up to a third of SMEs think the bank still isn’t open for business.

When you realise that as recently as last year RBS’s own staff ranked lending a distant third in their list of priorities (well behind getting deposits and protecting against risk) that doesn’t come as a great surprise.

That’s not the only hurdle still standing in the way of a proper level of prudent lending to small firms by RBS

As that pendulum swing in total bank lending to SMEs shows, relationship managers and credit officers have become too risk averse, turning down applications which Sir Andrew says they should be approving.

Worse, the bank’s whole approach to business and commercial lending is split between different divisions and different teams with different objectives.

This goes beyond the fact that some of the people who deal with business most often are not business bankers but retail banking staff. It is where the whole Global Restructuring Group controversy raises its very ugly head.

GRG is meant to manage the bank’s relationship with business and commercial customers whose businesses have hit trouble. But Sir Andrew’s report shows that it is a standalone entity, a profit centre in its own right, and that even the bank’s own business and commercial divisions couldn’t see what was happening to customers who disappeared into it.

The ugly mess which surfaced in the Sunday Times is the end result: it still smacks of the practices of the Fred Goodwin era where the bank’s  profit chasing got out of kilter with the economy and customer need

Sir Andrew’s report suggests that these messes are largely history and that the bank is in much better shape to deliver the service it always should have done – prudent, well-informed lending which made the most of market opportunities.

The problem is that many SMEs just can’t see that yet, and Sir Andrew almost seems puzzled as to why that’s happened.

I’ll give him a clue, here: another one of RBS/NatWest’s post crunch blunders was in waving goodbye to seasoned communications officers working in the regions – trusted people who knew how to get a message across.

It still hasn’t repaired that damage. When I spoke to the bank yesterday about its treatment of Kevin Riley in Nottingham the response came in the form of a statement from Edinburgh. And its two ‘regional’ communications people are based in London.

RBS is a bank which became too big and too centralised in its outlook, property-based profit chasing leaving it blind to a boatload of trouble. Now, it’s probably in a much better position to lend well and deliver more valuable relationships to SME businesses.

Here’s hoping it doesn’t turn into a distant giant again.

HS2's timetable troubles

Has HS2 suddenly hit the buffers?

Some of its opponents might be suggesting that today after a report from the National Audit Office basically said Government hasn't made a very strong case for it.

But if you read the report (as I have) you'll realise that its heavily nuanced language does not say that the case cannot be made. Rather, it says it needs to be made clearer.

So the NAO is really saying that the case for HS2 is not clear...yet.

Nevertheless, its analysis of the Government's work on HS2 so far has plenty of ammo for opponents.

The cost-benefit analysis is poor because it contained errors, the business case is built partly on data which is in some cases more than 10 years out of date.

Then there's the small matter of an apparent £3bn funding gap in the first phase, and a challenging timetable for that first phase to actually get going.

Civil service insiders will tell you it's a must-do-better warning shot rather than a damning verdict. The money almost certainly can be found and ministers were already revising their case for HS2 when the NAO was drawing up its report.

Neverthless, the NAO's report reads like an analysis of a hard-pressed government department trying to push through an enormously complicated project to a tight timetable when it's short of expertise. The big risk there is that expensive mistakes are made (remember the West Coast franchise fiasco?).

What about Nottingham, which is hoping to benefit from an HS2 station at Toton in stage 2 of this £30bn project? The positive is that the NAO believes the economic benefits of the second stage should be much stronger than the first stage.

But if its warnings about the first stage timetable are proved accurate our long wait for that second stage may be longer still.

Westminster fiddles while the economy burns?

I suspect that George Cowcher, the chief executive of Derbyshire & Nottinghamshire Chamber, is probably being his normal diplomatic self when he says that Conservative party politicking about an EU referendum is “extremely unhelpful”.
While it’s true to say that businesses are unlikely to shed any tears if there was a bonfire of EU red tape tomorrow, Britain’s relationship with the Union is currently number 99 on the list of the top 10 challenges they face.
Businesses really do get riled by the time and money it takes to satisfy rules simply to get the job done (especially when the EU is meant to be a barriers-down single market), but what they crave more than anything else is stability: if we know what the rules are and they’re the same for everyone then they’ll usually grin and bear them.
The spectacle of politicians down in London spending OUR time and money jawing about an EU referendum might well strike businesses as not just indulgent but also irrelevant to where the economy is at right now.
What about business rates revaluation, what about energy and raw material costs, what about infrastructure, what about the availability of funding and the cost of new facilities, what about sorting UK government red tape?
Derbyshire & Nottinghamshire Chamber is the third biggest in the country, so the views of the businesses who comprise its membership ought to count for something.
Those views, expressed through its respected Quarterly Economic Survey, are that two-thirds of businesses want the UK to stay in the EU. What they want to change is the UK taking more control over some of the one-size-fits-all rules governing issues like employment.
The EU is not good at persuading ordinary people of its value, and has recently had a nasty habit of asking the same question a different way when people give it an answer it doesn’t like. As an institution, it has seemed both wrong-footed and lead-footed amidst the Eurozone crisis – a crisis that has had a painful impact on ordinary people in Greece and Spain.
Not being part of the eurozone has unquestionably helped the UK’s sluggish economy, allowing us to manipulate both interest rates and currency value in a way individual Eurozone countries cannot.
But businesses largely believe being a part of the wider EU at worst doesn’t make any difference, at best has its merits. If the Chamber’s survey is anything to go by, it’s the rules they quibble over, not club membership.

A mile wide, an inch deep

The Boston Marathon bombing was a shocking event.
But what happened afterwards on social media was just as disturbing in its own way.
For professional reasons I had to keep an eye on the unfolding drama, among other things following the Twitter hashtag #bostonmarathon.
The Tweets which poured out combined grief, fear and almost a sense of collective panic mixed with a desire for revenge.
Fear and revenge can be a poisonous mixture, though. Put that together with some amateurishly inept web-only news sources and you had a situation where innocents were identified as suspects and police and the FBI were being bombarded with useless information.
We now know from a solid piece of reporting by the Washington Post, among others, that this at the very least complicated the investigation - and that the eventual decision to release images of the two prime suspects was taken partly in order to prevent any more innocents being fingered.
There was worse. Shocking images of the bomb victims were tweeted (sometimes with 'ooh, this is awful' comments), while at the end a gruesome photograph of one of the suspects was tweeted after his death.
This wasn't social media's finest hour.
Thanks to the web, I routinely read a few foreign newspapers these days, among them the Washington Post and the Sydney Morning Herald.
The Washington Post carried a forensically detailed account of the Boston bombing investigation which lifted the lid on the impact social media had on the work of the police and the FBI. The Post's reporting also told the story in an authoritative depth which social media hasn't come close to.
The same day, the Sydney Morning Herald carried a story about the habits of young people and social media, highlighting a tendency to sample lots but look into little.
In short, it suggested they live their lives "a mile wide, an inch deep".
Which pretty much summed up what social media did with the Boston bombing.

HS2: Why the race is on for Nottingham

HS2 sounds like a fabulous opportunity for Nottingham. But we also have to recognise that it’s a potentially significant competitive threat.
So may be the fact that it’s 20 years away is not necessarily a bad thing.
Examining the route it will take tells you three things: that the project is almost certain to run into opposition from people whose properties are likely to be bulldozed out of the way, and that it is an extremely ambitious civil engineering project.
In the East Midlands alone, the route tunnels directly underneath the runway at East Midlands Airport, under the M1 at two points, over rivers, through residential areas.
The third thing? If it stays anywhere near on budget I’d be amazed.
But the challenge. Being 51 minutes from London, just over 20 from Birmingham and a similar sprint to Leeds sounds like a major opportunity. And that’s the way it should be seen – an opportunity to get across the benefits of Nottingham to cities and conurbations suffering the economic and social pressures of crowding and expense.
And the benefits of Greater Nottingham and beyond and as a business and leisure destination: brilliant transport infrastructure, an international centre for life sciences research, a global centre for data analytics expertise, what should by then be a burgeoning digital/creative quarter, a thriving enterprise zone, clean technology expertise, and proximity to the high-tech engineering giant that is Derby.
HS2 could solve staffing problems for some of our indigenous businesses, too, putting them in touch with a wider pool of talent.
But HS2 also means the pressure is on Nottingham yet again to get itself into an attractive shape as a place to live and thrive – great shopping and leisure, first-rate visitor attractions, high-quality schools, a clean and safe environment.
We need that major retail development to happen so that Broadmarsh gets tidied up and the Victoria Centre modernised. We need to make the most of the castle and Robin Hood. And what about a Museum of east Midlands Industry somehwere between Nottingham and Derby (may be nearer Derby, because of a heritage that stretches from Arkwright to the best jet engines in the world)?
Much has been achieved here over the years. But HS2 means we will be compared with bigger, better places and raises the bar.
It isn’t just a train that’s barrelling down that high-speed line. It’s a big challenge.

That High Street 'bloodbath'

Another high street bloodbath? I’m not so sure. The stories of Jessops, Comet, HMV and others are the stories of businesses which died long ago.
They are the zombies, businesses whose model was holed below the waterline by e-tailing, technological change and so-so service and a generic proposition. Shoppers deserted them, debts piled up and it was only credit from banks and suppliers that kept them alive.
If anyone does shed tears for their demise they must be a crocodile: just like the hordes who say they wish there were more independent local shops, they don’t practice what they preach.
My colleague Ian Griffin has already delivered some serious insights into Jessops in the Leicester Mercury and on his blog (insights better than the nationals, BTW). Suffice to say, the fact that I’m tapping this out on an iPhone 4S with an 8 megapixel still and video camera tells you all you need to know about what happened to the market for snap cameras.
And the last time I went into Jessops with my Nikon they tried to flog me something I simply didn’t need – a sharp contrast to the days when it was the go-to place for real photography enthusiasts.
It was the same story with Comet, a business which didn’t offer anything that wasn’t available elsewhere. There was no added value in a Comet sale, service was unexceptional, and the Teflon-coated venture capital deal which kept it alive towards the end has left a very nasty taste in the mouth.
As for HMV…let’s go back to that iPhone and click on the iTunes app. When you do, stores like HMV die a little every time. Why would I – or anyone else – travel to a store to buy music or film when we can sample both online and get it delivered straight to our device?
I’m not sure that’s as cut-and-dried as conventional wisdom suggests. HMV subsidiary Fopp still has an enthusiast following and the sense that what’s on the shelves is being chosen and curated by people who know their market and care about it. There may still be some mileage in that.
Similarly, there are still decent numbers of people who buy CDs and DVDs because digital disc players remain in production. Granted, a lot of them now buy from bargain stands in supermarkets, but there is probably still enough business in cities for some kind of entertainment-based retail chain. We’ll see.
I don’t think the demise of these chains tells us anything we don’t already know about the challenges facing retailers and retail destinations. Rather, it sends out a warning that this could be the year when zombie companies of all kinds – businesses surviving on credit lines and little else – finally come off life support.
There may be some cries about ruthless banks, hard-hearted suppliers and a weak economy when that happens.
Wiser counsels might observe that throwing good money after bad does nothing to help an economy recover. Better to spend it in businesses which have got real opportunities to grow.