Brexit is a nail in the high-street bank’s coffin

Opening a letter from Santander recently, for a moment I get a sense of the kind of popular outrage directed against London and its financial industry – even though the latter benefits me more than most.

My local bank branch, it seems, is closing.

I am subject to one of about 140 UK branch closures, about a fifth of the network, that Santander announced in January.

I picture the kind of boarded-up shopfront that is becoming all too familiar in the British high street. It’s a sad sight that will become more normal, I reflect, as the UK’s toxic political environment weighs more heavily on the economy and business investment: even if we avoid a disastrous no-deal Brexit.

The rage soon switches back to our politicians.

The next news I see is that shares are plummeting in Metro Bank. This is the challenger whose strategy is supposed to be a rare source of hope for those who want branches to remain a cornerstone of banks’ consumer businesses.

Metro’s sell-off is down to an accounting error over risks in its loan book, but also because of stubbornly low interest margins: made worse by a mortgage market now suffering from Brexit.

Today, the big banks in the UK must weigh the potential savings that they can make from closing branches, with the boost those closures will give to new online rivals.

Dubious honours
Branch closures 2015-2019

Source: Which?

Unlisted Nationwide Building Society has cut few branches, and maintains competitive prices. However, bailed-out Royal Bank of Scotland (RBS) is already taking the strategy of launching its own online challengers, including Bó (for consumers) and Mettle (for small businesses). Santander could do so soon in the UK with Openbank, already active in Spain.

My second thought, after reading the letter from Santander, is to connect it with the much more circumspect approach to growth in Santander’s UK business after the 2016 Brexit referendum.

Santander is the biggest challenger to the big four UK banks and before 2016 the UK was Santander’s most promising market. Since Brexit, however, Santander’s market-beating interest rates on deposits – its tested way of challenging incumbents – have become relatively less attractive.

The branch closures seem to fit into a pattern a few days later, when the news emerges that Santander is not participating in the EU redress scheme for RBS to fund rivals to take on clients among small and medium-sized enterprises (SMEs), despite previously indicating it would do so.

The relative caution around the UK that Santander executives have expressed to me over the past two years seems to be accentuating.

Things must be getting pretty bad if RBS can’t pay an important rival to take its business.

Santander connected its decision on the SME scheme to Brexit, according to Bloomberg, but it would be foolish to do so regarding the branches. In fact, it has not – unlike RBS – closed proportionally more branches than rivals in recent years.

Worrying message

Yet the timing and sudden nature of Santander’s branch move is unfortunate. Other banks have announced closures earlier and more gradually. This could send a worrying message to the public and to markets about confidence in the country, as Brexit gets rapidly messier.

For all consumer-orientated companies, the growing political and economic mayhem that surrounds Brexit will surely make it more important for them to cut costs and not duplicate high-street operations, as they too look to switch to digital channels.

There is, perhaps, relatively greater chance in London that bank branches will be replaced by a livelier independent shop. If so, good riddance. London has experienced an average number of branch closures in UK terms, according to Which?, a consumer magazine. But there’s another branch up the road anyway.

Obviously, things might not be so assured in the kind of further-flung and less well-populated areas that tended to vote for Brexit in the first place.

It will certainly be difficult for Santander to ascribe all this to its commitment to the UK, but it is equally hard to question it as a business decision.

Lloyds announced branch closures, albeit fewer of them at once, when Brexit looked less scary, about a year ago. Overall, it has not reduced its search for UK growth to the same extent as Santander, since 2016. That’s because it has less choice.

Santander can opt instead to bet on its businesses in places now growing faster than Britain such as Brazil, Mexico, Spain, and even Portugal.

One Santander insider suggested to me a year or so ago that the public benefit of it taking a more cautious stance on UK risk and costs is that it will be less likely to need bailing out in a crash, and could be better placed to lend into the recovery.

On the other hand – even for the sake of political stability, particularly outside London – the British high street now needs bailing out much more than the banks.

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