After a rollercoaster year, banks can highlight their financial mettle and customer empathy

Last week, an email dropped into my inbox from my high-street banking provider. Headed “Cost-of living crisis”, the message urged me to get in touch with them if I was under financial pressure – and offered me support, advice and information if I needed it. I found the email heartening.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

For me, it illustrated how seriously the banks are taking their responsibility to help customers through the current turbulence. Less positively however, the fact that such emails are still needed underlines the continued tough conditions facing consumers, especially those on lower incomes.

This same sombre message came across loud and clear in UK Finance’s Q4 2022 Household Finance Review (HFR). It painted a picture of the ongoing cost of living pressures. For example,  inflation, while apparently starting to ease, remained at historic highs, and there was an uptick in interest rates that contributed to a significant drop in personal borrowing and mortgage applications during the quarter.

While consumer confidence in the general economic situation had recovered slightly following the unwinding of the fiscal measures announced in September, it remained well below previous lows – including those seen during the global financial crisis of 2008-2009.

However, in today’s fast-moving economic environment, a few weeks is a long time. And while the Q4 HFR was published as recently as early March, it seems much longer ago – because of the number and scale of events that have occurred in the few weeks since.

As well as chancellor Jeremy Hunt’s first set-piece Budget, these have included the sudden emergence of financial challenges in the banking sector in both the US and Europe, the release of the UK consumer prices index (CPI) for February – which confounded expectations by jumping back up to 10.4 per cent – and, most recently, a further quarter-point rise in the Bank of England’s (BoE) base rate to 4.25 per cent.

While this rise underlined the Monetary Policy Committee’s (MPC) determination to get inflation under control, its relatively small size reflected the overarching dilemma now facing the BoE and its MPC: how to bear down on inflation while also maintaining financial stability and avoiding slowing the economy still further.

For the UK’s retail banks, today’s multifaceted environment presents an interesting set of dynamics.

On the one hand, they’re in a good place financially – having announced relatively strong results for Q4 2022, with 11 per cent growth in aggregate revenues. They have also lifted return on tangible equity guidance to 12 per cent to 16 per cent for FY23, compared to the ten per cent considered difficult two years ago.

So by recent historical standards, the next 12 to 18 months are looking quite positive for the banks in terms of financial performance. Though they’ll need to focus on strategic actions to grow the bottom line and ensure they are able to demonstrate strength on both sides of the balance sheet.

On the other – as illustrated by the email that I mentioned earlier – they have the opportunity to truly support their customers through tough times with the right advice, tools, products and financial literacy. It’s a fine balance that I’m delighted to see that many banks are actively seeking to strike, reflecting the industry-wide imperative to remain resilient and retain customer and shareholder trust in the face of uncertainty.

The overall effect? There’s the chance for banks to do both the right thing for customers – and also to generate significant value for shareholders. Get both aspects right, and they’ll be able to outperform their peers and do so without attracting the adverse media comment being directed at some other industries.

Achieving all of this will require more than clear and open communication. To compete effectively in the continued choppy conditions, banks will need to think hard about their portfolios and pricing in terms of pass-through rates, the products and features they offer, and transforming legacy systems, customer experience and engagement they provide – not least via digital interactions and apps.

The message? The current environment presents banks with the opportunity to do well while also doing good. The key will be keeping their finger on the pulse of their customers.

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