The financial crisis (2007-09) unearthed several fundamental issues in the UK banking market, propelling banks, and the regulators, to prioritise a sustainable ‘back to basics’ business model.

The crisis and the aftermath triggered banking institutions to significantly adjust their business, earning returns from taking in deposits and lending them out, and making a percentage mark-up on the difference (Net Interest Margin). Recent increases in the Bank of England base rate have seen banks and building societies significantly increase their NIM and profits whilst yielding criticism of not passing on increases in base rates to savers. Forthcoming Consumer Duty regulation places price and fair value as a core requirement and this raises questions on the desirability of interest income focused banking business models going forward.

The latest base rate rise will impact around 2.2 million households as they brace for an immediate increase in their monthly mortgage payments. As an example, a hike from 0.1% to 2.25% is the equivalent of an additional £3,000 pa (£250 per month) for the average customer borrowing £140,000 on a tracker or SVR mortgage. Add to that energy costs for the average household having doubled to c. £2,500 pa in the same period (an additional £1,250 pa or £100 per month) and the average household budget will be seeing a sizeable £350 negative adjustment.

The last decade has seen retail banking strategy centred on mortgages and the cost-of-living crisis could see confidence fall, bad debts rise and demand for mortgages fall, especially if the UK experiences a prolonged recession.

Banks should look to hone their strategy and the following should be on their radar:

• Income diversification looking at fee and commission earning products and rebalancing their secured/ unsecured lending portfolios
• Cost optimisation focused on their customer journeys that deliver good customer outcomes and optimising the costs and investing in the areas that generate positive experience and loyalty whilst eliminating costs associated with adverse outcomes and failure demand.
• Regulatory compliance management aligned to the intent to prevent foreseeable harm (including real time customer monitoring and interaction) whilst simultaneously protecting against future remediation and redress overheads.

Use the button below to read our Financial Services Consulting team’s view on what banking institutions should consider to diversify their income sources and manage their business through more volatile future economic cycles.

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If you would like to discuss this further, please don't hesitate to get in touch with myself, a member of our Financial Services team or your usual Johnston Carmichael adviser.