With Lloyds Banking (LSE: LLOY) (NYSE: LYG.US) and RBS (LSE: RBS)(NYSE: RBS.US) set to present full-year figures this week, investors’ eyes are on their near-term performance. Lloyds is currently the prettiest girl at the dance, poised to return to the dividend list and buoyed by the UK’s booming economy and housing market. RBS should see similar progress in turning around its domestic business, though analysts expect that write-downs on the value of its holding in US Citizen’s Bank will dent headline profits.
Threat
In the longer term, both banks face more significant, potentially existential, threats in their core markets. Consider the supermarket sector for a moment. Aldi & Lidl have just 10% of the grocery market, yet their arrival has wreaked havoc for the mainstream supermarkets. Could peer-to-peer lenders do the same for High Street banks?
The CEO of Zopa, one of the leading peer-to-peer platforms, thinks its current 2% share of the personal loan market could rise to 20-30%, with peer-to-peer lenders taking a 50% share overall. Other platforms are geared to small business loans. Like supermarket discounters, peer-to-peer lenders offer a stripped-down, value-for-money, narrow product range. Their lower overheads and minimal regulatory baggage mean they are cheaper for lender and borrower. They similarly present themselves as the consumers’ champion in contrast to the greedy, uncaring established players — though I fear some customers could end up worse off.
Both RBS & Santander have entered into alliances with peer-to-peer lenders; moves reminiscent of Sainsbury‘s ‘if you can’t beat them join them’ joint venture with discounter Netto. It’s an experiment investors in both sectors should watch closely.
Worst hit
If peer-to-peer lending grows as its proponents wish, then worst hit would be the banks most reliant on the UK personal & small business market, with Lloyds and RBS in the front-line. The likely effect would be to push down loan margins and pressure the banks’ profits — and, as a side-effect, accelerate moves to unbundle pricing and charge customers for current accounts.
A more serious development would be if peer-to-peer lenders moved into the retail mortgage market. There’s no prospect of the FSA countenancing that at present, but if a liquid market in peer-to-peer deposits were to be developed — something that’s entirely feasible – then the threat to retail banks’ profits would be massive.
Complacent
Does all this sound fantastical? Investors in supermarkets were pretty complacent before Tesco‘s now infamous — and unanticipated — profit warning in 2012. Lloyds’ return to paying dividends has been interpreted, in some quarters, as a return to pre-financial crisis normality. But the new normality for banks is different. They are no longer shares you can tuck away and forget about.
