Dusk or dawn for banking and finance in London?

CUSHMAN & WAKEFIELD

03 LEAD STORY

LEAD STORY

Dusk or dawn for banking and finance in London? London’s banking and financial services sector saw unparalleled growth before the crash. Now it faces a myriad of unprecedented challenges that could stop recovery in its tracks. Could these potential headwinds have a long-lasting effect on the prosperity of the sector? Or do they present an opportunity for reinvention?

In the aftermath of the biggest crash since the 1930s, London’s banking and financial services sector is standing tall, and finally on an upward trajectory. However, with the combination of a skills shortage, regulatory changes, rising costs, new entrants and the possibility of Brexit, the sector faces another wave of challenges. The latest CBI/PwC financial services survey shows that during Q2 2015, the majority of financial services firms reported the fastest rising business volumes since the 1990s. Overall, optimism, business volumes and profits are all heading upwards. This is evidenced by the recent announcement by the Government to continue to sell off shares in both Lloyds Bank and RBS, with Lloyds Bank returning to profit and RBS expected to follow. But confidence amongst banks remains relatively low in comparison with financial services firms who are more optimistic about business volumes and employment prospects. It is the latter who are most likely to prosper in the short term. CUSHMAN & WAKEFIELD

Following a period of contraction in the wake of the financial crash, employment in the banking and financial sector has seen some growth; it currently employs over 345,000 people and accounts for around 7% of London’s workforce. But employment levels now lag behind the media and tech sector and professional services which account for 8% and 14% of the workforce respectively. Employment levels are expected to remain flat for the foreseeable future, but this disguises a significant level of change in jobs between the different segments within the sector. A decrease in employment is expected in investment banking but this is counteracted by expansion in securities trading and investment management. The latter is set to benefit from the new freedoms in personal pensions for the over 55s which came into effect in April this year. The growth of high net worth individuals and sovereign wealth funds will also increase the total assets under management. Banking recruitment, meanwhile, is driven

04 LEAD STORY

TOP 10 BANKS BY TIER 1 CAPITAL Source:The Banker

248,608 $m

01 BANK

COUNTRY

ICBC

China

BANK

COUNTRY

CCB

China

BANK

COUNTRY

J.P. Morgan

US

04

COUNTRY

Bank of China

China

PREVIOUS RANK

03

PREVIOUS RANK

07

168,973 $m

05 BANK

COUNTRY

Bank of America

US

06

PREVIOUS RANK

04

167,699 $m

BANK

Agricultural Bank of China

07

COUNTRY

China

PREVIOUS RANK

09

166,519 $m

BANK

COUNTRY

Citigroup

US

PREVIOUS RANK

06

154,666 $m Telephone PREVIOUS COUNTRY RANK 85m US

BANK

Wells Fargo & Co

08

152,739 $m COUNTRY

UK2010

10 117,645 $m BANK

02

184,231 $m

BANK

Internet BANK 565m HSBC Holdings

PREVIOUS RANK

186,632 $m

03

09

01

202,119 $m

02

08

PREVIOUS RANK

Mitsubishi UFJ

COUNTRY

Mobile Japan 86m

PREVIOUS RANK

05 Branch 502m PREVIOUS RANK

10

primarily by a need for companies to boost capabilities in compliance and governance as well as changing business strategies. The same PwC report found that only 5% of companies in the financial services sector are confident that they can meet their skills needs amid rising demand, not just for compliance, but also technology and customer services. These changes are driven by the banks’ emphasis on improving the customer experience and repairing their ‘tarnished’ reputation. A recent report by CEB highlights that 36% of the UK’s bank customers are satisfied with the products and services on offer – more than twice the global average of 17%. However, UK banks didn’t score too high on trust with 44% saying they have little or no confidence in banks’ abilities to keep their promises and another 51% said they didn’t believe banks care about their customers. It’s not just customer satisfaction that banks need to turn around. Supervision of the financial system has shifted from ‘light touch’ to ‘interventionist’ and ‘consumer focused’. Whilst this has affected many segments of the financial services sector, none more so than banking, and London has seen more regulatory upheaval than many other locations. But the recent budget brought a Telephone glimmer of hope for the sector. The 85m banking levy is to be phased out over the next six years to be replaced by a surcharge on bank profits from next year Internet – a policy that is designed to increase 565m 2010 the competiveness of UK banking. The Branch banking levy has been unpopular and 502m has caused many banks to reassess their exposure to London and the UK. HSBC and Standard Chartered are two high Mobile profile companies 86m that publically raised the possibility of relocating their HQ functions out of London in response. Whilst welcome news, it will beTelephone 2021 before it is fully implemented, and 74min the short term many banks will be impactedBranch by a Internet double taxation smaller 705m while a number of 427m banks will be brought into the taxation bracket. Longer term, combined with a 2015 fall in corporation tax, it should increase the competitive advantage for UK banks against foreign rivals operating in Britain. But UK banks will still be required by law to ring-fence theirMobile retail operations 895m such as from their riskier activities CUSHMAN & WAKEFIELD

HOW BANKING TRANSACTIONS HAVE MOVED Source: BBA

Telephone 85m

Tele 74m Internet 705m

Internet 565m

2010

2015

Branch 502m

Mobile 895m

Mobile 86m Telephone 74m

Telephone

Branch 427m

Internet 705m

2015

Mobile 895m

Internet 528m

Telephone 64m Branch 268m

2020

Mobile 2,341m

AsInternet the global 64m 528m centre of financial services and a tech hub,2020 London gives fintech entrepreneurs access to an Mobile unparalleled 2,341m pool of talent, from developers to product managers to compliance officers to sales — Ismail Ahmed, co-founder of WorldRemit (FT, 13 April 2015)

B 2

05 LEAD STORY

Non-ferrous metal trading

THE UK’S MARKET SHARE IN GLOBAL FINANCIAL MARKETS

International bond trading

Source:The CityUK

90%

70% Derivatives (OTC interest rate)

37%

Foreign exchange trading

19% 19% 18%

6%

Hedge fund assets

investment banking by 2019. This is dividing the sector. Santander recently announced plans to meet the rules but HSBC in contrast has been highly critical of the legislation and is relocating its retail banking operation to Birmingham in response. As far as investment banking is concerned, we expect that they will continue to retreat from capital intensive, high risk areas. Some companies are choosing to respond to increased costs, squeezed margins and regulatory pressure by undertaking M&A activity as means of building economies of scale. Aberdeen Asset Management’s acquisition of Scottish Widows, Standard Life’s purchase of Ignis and Man Group’s agreement to acquire the investment management business of NewSmith LLP have all widely been regarded as positive moves. We expect to see the M&A trend continue as the larger fund managers drive up AUM and in parallel cut operational costs. However if Brexit materialises, could it create an irrevocable hole in the City? We already know that certain banks are reviewing their future in the UK. History tells us that London has always been able to adapt to change and attract new entrants. However, global competition is fiercer than ever before. A report by Tosca Funds forecasts that eight of the world’s top 20 banks will be Chinese by 2020 and that the Chinese will be a dominant force in the global insurance market by this time too. The latest Banker Top World

50%

46%

Marine insurance premiums

HSBC and Standard Chartered are two high profile companies that have publically raised the possibility of relocating their HQs out of London

Ship-broking – tankers

Cross-border bank lending

12%

Securitisation issuance

Private equity investments

turn, makes them an even more essential part of everyday life. You only need to look at the take up of mobile banking apps and mobile banking by consumers. Banking apps were used 10.5m times a day in March this year, while there were 9.6m daily log ons to internet banking services. Lloyds Bank has recently announced it is working on a new system that lets customers pay in cheques through a mobile app, similar to Barclays Pingit app, and the rest of the sector is looking at new mobile technology with the aim of launching an industry wide mobile imaging system in 2016.

Banks listing shows that China is the source of three of the top five global banks. And therein lies the opportunity, as Chinese corporations continue to expand overseas, more mainland Chinese banks are looking to expand globally… and where better to get a foot into the European market than London? Regardless of Brexit, the face of banking is changing, offering equal opportunity and challenge. Digital disruption is shrinking the role and relevance of today’s banks but simultaneously forcing them to create better, faster, cheaper services, which in

LONDON FINANCIAL SERVICES EMPLOYMENT Source:The CityUK

Banking

Fund Management

Insurance

Financial Services

Market Infrastructure and other

400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 2007

2008

2009

2010

CUSHMAN & WAKEFIELD

2011

2012

2013

2014

2015 (f)

06 LEAD STORY

TOP 5 EUROPEAN REGIONS FOR FINTECH INVESTMENT ACTIVITY, 2014

Enter FinTech A recent YouGov survey shows that 81% of respondents believe the FinTech sector is already having that impact on the traditional financial services sector. Fortunately, London boasts some of the very best FinTech companies in the world. London based companies account for almost half of the latest FinTech 50, a list of start-ups considered gamechangers. Last year more than half of all European venture capital investments in FinTech companies went to London firms, amounting to a record $539m (£342.6m) of funding. Currently the sector employs more people than New York or Silicon Valley. All London now needs to do is harness this and continue to hold its leading position.

Total Investments $m, 2014

Such technological advances create new opportunities for new business models. The Government recently altered banking rules to enable new start up banks to open with less capital, in turn, spicing up competition in the UK’s banking sector. Atom Bank is set to become the first bank to cater for customers who only want to manage their finances on their smartphone or tablet after receiving the green light from regulators.These channels are less expensive and more adaptable than the traditional bank branch and should be more nimble to the needs of its customers. It won’t necessarily be plain sailing for the new kids on the block as they try to convince customers to switch from longestablished providers, but for millennials who want fuss-free banking on the go, they have potential to fulfil the needs of an underserved customer segment. To stay ahead of the game, existing financial services companies must increase their investment in both marketing and technology. Enter FinTech (financial technology). These companies harness the power of technology to make improvements in the way the financial sector operates, developing everything from data analytics tools, to payment models, mobile payment systems and alternative funding mechanisms.

Bubble = Total Deal Volume Source: Accenture and CB Insights

800 700 600 500 400 300 200 100 0 0

10

20

40

30

50

60

Total Deal Volume, 2014

UK & Ireland

Nordics

Germany

Russia

Netherlands

RANKING LONDON: FINTECH AND BIG DATA WORKERS (Estimated jobs, thousands, May 2014) Source: London: Digital City on the Rise – South Mountain Economics

UNITED STATES

FO

BDO

New York City (50 miles) New York City (25 miles) San Francisco – Silicon Valley (50 miles) San Francisco – Silicon Valley (25 miles) Boston Seattle Washington DC

48 43 13 11 10 3 7

66 57 118 98 38 29 53

United States total

200

588

CUSHMAN & WAKEFIELD

FO BDO

FINTECH OCCUPATIONS BIG DATA OCCUPATIONS

UNITED KINGDOM

FO

BDO

London (50 miles) London (25 miles) Cambridge Edinburgh Manchester Oxford

51 44 1 3 3 2

68 54 7 2 3 4

United Kingdom total

82

102

07 THE HOT ISSUE

OPINION

THE HOT ISSUE

Positivity filters through to demand

If London wishes to maintain its place as one of the world’s leading financial centres then investment into FinTech will have to be at the heart of its efforts

So will this lead to a resurgence for the sector in the leasing market? Well yes, the more positive outlook from the banking and financial sector is starting to be reflected in an upturn in activity. This is a welcome relief for some developers who were concerned about the recent reliance of the leasing market on the media and tech sector. We are definitely seeing growth in employment in areas such as wealth and fund management feeding through into the leasing market. Fund management and hedge funds have seen a year-on-year upturn in leasing volumes since 2011 and account for an increasing proportion of total banking and financial services takeup. The recent news that Brevan Howard are contemplating returning to London from Geneva along with number of other large hedge funds, also planning to expand or launch in London reinforces the importance of this sector to the London market. We expect to see a steady rise in the number of boutique advisory firms as rain makers plot a path of independence and their destination of choice will continue to be Mayfair and St James’s. But the City is also benefiting from an upturn in active demand from the more traditional banking sector which includes a number of larger current requirements such as Wells Fargo, SMBC and Credit Agricole. These banking requirements are typically prompted by lease events and consolidation and, while we don’t anticipate any significant net expansion in floorspace needs in the short to medium term, the fact that these banks and other large financial services companies are now leasing larger swathes of space illustrates their commitment to London. Most recently we have seen Deutsche Bank leasing 389,000 sq ft down in Canary Wharf and, as speculated in the press, Royal Bank of Canada are looking to prelet c. 300,000 sq ft of space in 100 Bishopsgate. We have also seen the removal of grey space from the market – most apparent down in Canary Wharf – as existing banks look to reoccupy space

as the regulatory burden results in them needing additional space to accommodate this expanding parts of their business. However, it’s not all positive news on the leasing front. We need to be mindful that alongside the rising costs of recruitment and staffing, financial services companies are facing ever increasing real estate costs in the capital. Rents are approaching their pre-recession peaks across the capital and forcing many companies to weigh up the cost/benefit of having staff in London. While there has not yet been a mass exodus of companies, we may start to see some functions relocating outside of the core areas. On the whole so far, the sector generally remains loyal to its location but we are seeing some of the wealth funds/hedge funds migrate from Mayfair to North of Oxford Street, while Canary Wharf continues to attract the big banks. One of the reasons for HSBC selecting Birmingham as the location for the new HQ of their UK retail banking was the cost benefit of being outside London. But the competition may be closer to home, with Metro Bank for example reportedly considering setting up their new HQ in Croydon – moving from Holborn. If London wishes to maintain its place as one of the world’s leading financial centres then investment into FinTech will have to be at the heart of its efforts. And this job creation should fuel future office take-up and will replace more traditional banking and financial services roles in London. One example of this changing face is Funding Circle, who have just leased 60,000 sq ft at 71 Queen Victoria Street, increasing their property holdings from 15,000 sq ft. We expect FinTech to disrupt the entire industry, but increasingly we expect to see the wider industry embrace such firms, helping drive change and innovation from within. Work place environments will need to adjust to take full advantage of the opportunities that new technology and new thinking brings. London has an unrivalled opportunity to be at the centre of such change. CUSHMAN & WAKEFIELD

Banks facing relentless pressure By Simon Ward Partner, Banking & Finance Sector Group, Account Management

So the banking and financial services industry faces a number of challenges, all of which affect the future sustainability and profitability of banking products and services, as well as their businesses and structures. For example, HBSC calculates that the cost of implementing the ringfencing rules and the consequent move of its retail business to Birmingham will cost it up to £2bn to implement. Couple that with the expectation that global economic growth is forecast to be subdued for a prolonged period. At the same time, the sector is evolving rapidly with the development of mobile services for customers and the digitisation of its businesses. This is producing a better, faster, cheaper experience for customers as well as improving security and compliance for transactions. For the banks themselves, this provides the opportunity to offer a multi-channel experience whilst keeping costs down. Developing such services and capability can surely be achieved without needing to locate staff in expensive ‘downtown’ office locations? With competition remaining intense and margins still under pressure, we foresee banks continuing to challenge the need to maintain the scale of operations they have in London and other expensive central business districts. Whilst one or two banks are making noises about moving their HQ out of London because of the banking levy, it is hard to envisage London not remaining a key global financial centre for the foreseeable future but it will clearly need to adapt and evolve to maintain its competitive advantage in the longer term. Why? Well to quote HSBC: ‘Of the world’s top 30 economies, we expect those of Asia, Latin America, the Middle East and Africa to have increased by around four-fold in size by 2050, benefiting from demographics and urbanisation. By this time they will be larger than those of Europe and North America combined. By 2050, we expect 18 of the 30 largest economies will be from Asia, Latin America or the Middle East and Africa.’

For more information on London’s banking and finance sector, contact:

Simon Ward [email protected] 020 7152 5866

James Young [email protected] 020 7152 5113

Vincent Simond [email protected] 020 7152 5806

Andrew Heard [email protected] 020 7152 5835

Cushman & Wakefield LLP 43/45 Portman Square London W1A 3BG