Retail banking is struggling to get off the canvas

AS Britain&rsquo;s retail banking sector fractures and polarises, it is beginning to resemble a boxing match: two heavyweight contenders are preparing to slug it out in the main event with the prize nothing less than commercial success.<br /><br />In the red corner are the grizzled veterans &ndash; the traditional banking groups HSBC, RBS, Lloyds and Barclays.<br /><br />Punch drunk from the credit crisis, the ageing champions are finding life increasingly tough and are desperately trying to figure out a strategy for coping with high costs and limited demand. They are also likely to be hit even harder as the economy eases out of recession because bad debts are expected to increase as defaults wash through the system and interest rates begin increasing again, piling further pressure on consumers.<br /><br />In the blue corner are the new entrants to the retail banking market, such as grocery giant Tesco.<br /><br />These young contenders are fighting fit, aggressive and don&rsquo;t have the legacy of bad debts to slow them down. They also have a superb distribution network already in place &ndash; such as Tesco&rsquo;s supermarket chain.<br /><br />The established players are going to have to face up to an increasingly hostile environment, if the latest research from business advisers KPMG is to be believed. A survey released yesterday forecast that Britain&rsquo;s banks are likely to see their retail arms slide into a loss in the second half of 2009.<br /><br />&ldquo;Retail banking is just profitable at lower levels, but with rising impairments, it seems probable that it will fall into loss making in the second half of this year,&rdquo; KPMG said in its UK Banks Performance Benchmarking Survey.<br /><br />The big four banks all posted profits from their UK retail operations in the first half, but the report warned that earnings were at much reduced levels as the impact of bad debts and other factors took hold. In contrast their investment banking divisions benefited from buoyant market conditions. KPMG has also predicted that commercial impairments in particular will remain high &ldquo;for the foreseeable future&rdquo;. Rising unemployment will be crucial to the success of retail banks going forward. Asset sales are also likely as banks seek to offload loss-making operations.<br /><br />Yet while some commentators debate whether Britain could do away with banks altogether, we are unlikely to see a complete abandonment of banking. Anyone with a salaried job would find it almost impossible to be paid or pay a bill without a current account. That means &ndash; to continue the boxing metaphor &ndash; retail banking is far from knocked out. But with an increasing shift to online banking, distribution of financial products into supermarkets and traditional operators desperate to cut costs, the new face of high street banking is likely to triumph.<br /><br />