Banking: a question of confidence

FINANCE '67

A SPECIAL SURVEY DAVID MONTAGU

The years from 1964 to 1967 will be remem- bered as particularly trying by the banking community of the City of London. It is not pure coincidence that these have been Labour's years in office. The general lack of confidence which has been the biggest single contributory factor to a series of sterling crises between 1964 and the present time was precipitated by the November 1964 mini-budget. The pattern which has emerged is one which few bankers would like to see repeated in the next three years and in this sentiment they would be joined by the boards of most industrial companies.

David Montagu i3 an executive director of Samuel Montagu and Co, merchant bankers.

Exhortations and controls are far from being the ideal conditions in which to operate a ser- vice industry. Banking has become an intensely competitive service business, and will becalm more so. The type of demands made upon the banking community by its clients has tended to expand and 'old closed shops' have tended to be opened up. The strict operational futte: tions of the clearing banks, the accepting houses, the issuing houses, the investment bankers, the discount houses, the stockbrogs, the money brokers and the running bill brokers, are overlapping and will tend to do so more and more. People are becoming aware that the package deal required by the client must be offered under one roof. It does not require a crystal ball to see that in the next ten or fifteen years the services provided by a merchant banker are going to have to be far more widespread. The industrial client will look to the bank as the shopper looks to the depart- ment store—he will hope to do everything in one building.

Even now, the tendency for merchant banks to become interested in such diversified fields as market research, management consultancy, insurance, advertising is already manifesting itself. The merchant banker of the future will have to be able to provide short, medium and long term finance and will have to go back to the days when taxation was not a dis- incentive to providing risk capital. For this greater resources, greater flexibility of manage-. ment and more vision may be required. The small unit will find it harder and harder to compete; a big unit will be at an advantage. At the same time the extremely personal rela- tionship of merchant bankers and their clients will tend to favour the bank with proven personalities.

The tendency for the joint stock banks to frrm merchant banking subsidiaries in order to compete for deposits is only one step towards operating in all the areas in which merchant banks now operate. For merchant banks to put their heads in the sand and to claim that there is some special mystique attached to raising money by new issues (beyond the reach of the joint stock banks) is similar to the type of thinking which at the time of Suez in 1956 suggested that it would be difficult for Egyptian pilots to get ships through the Suez Canal. The taxi fare from EC2 to Holborn to the investment managers of the Prudential and Pearl insurance companies is not beyond the reach of a joint stock bank and the attrac- tion of the skills and management required to handle issues is also well within their compass.

This is not to say that the clearing banks have shown any great aggression in entering into these fields of activity and I suspect that it will be some years before they do, but the tendency is going to be for everybody to want a share of the business available and it is as well to be prepared.

Where, then, are the merchant banks likely to spread their tentacles in order to protect their images and expand their business?

I have no doubt that the field of company advice, mergers and capital reconstructions is one which is bound to grow.

I have no doubt that the entry of the United Kingdom into Europe, if and when it happens. will create a great deal of business for the merchant banks acting primarily as the catalysts and the brokers in industrial marriages and the upbringing of the resultant offspring.

I have no doubt that non-financial ser- vices will have to be provided, as I have sug- gested above, by the progressive merchant banker. More and more, as in America, the technological advances which are changing the face of industry are changing the types of ser- vices it requires from its financial advisers. Money is the least of its worries. What it seeks is the most economical deployment of assets and the most advantageous fields of activity.

I have no doubt that the special position of the merchant banker, his network of close connections in foreign countries and the ability to think in international terms will continue to be a magnet to clients.

I have no doubt that tax advice and all forms of international fiscal planning will have to be provided. Whether or not to form hold- ing companies overseas to maximise the benefits of profits earned overseas and at the same time to minimise the tax liability will become a question to be answered by bankers.

I have no doubt, also, that the growth in demand for investment advice and portfolio management is in its infancy. The growing army of shareholders are developing, with the help of the financial press, a sophisticated approach to investment. Merchant bankers are uniquely placed to provide sound manage- ment based on well-sifted analytical approaches. Pension funds and unit trusts who require in- vestment advice have accepted, in the main, that the merchant banks have access to the widest possible range of opinion from brokers and others in all financial centres. Such a broad picture is not available to the average investor who is likely to select his advice by buying the investment and unit trusts managed by his selected bank.

With all these areas of activity it is quite natural to be optimistic for the future of the banking institutions in the City of London. Caveats, of course, must be made. Interference by government, periods of restraint and re- striction, will, by the very nature of the UK economy, happen from time to time.

The necessity for government to control credit as part of its overall management of the economy has been accepted by the financial institutions. Whether or not politicians succeed in their avowed intentions to minimise the fluc- tuations of trade and to dispense with `stop-go,' it is quite apparent that directives will continue to be made to the banking system as a whole.

What must be conceded is that the money market of London is more highly developed than any other in the world. The sug- gestion that there may be a shift from London to Paris, for example, of the capital market disregards fundamental facts which, in my opinion, are unarguable. The investing public of this country, the life insurance companies, the pension funds, the joint stock banks and the merchant banks have no parallel in France. Savings in gold under the mattress are in- herent in the continental temperament. We should be grateful that the Englishman still prefers gilt-edged and ordinary shares.

Confidence is the key to a successful bank- ing system, just as confidence in government it ,vital to the health of a currency. It would be fair to say that the City of London has retained international confidence. It might justifiably be argued that if this confidence is to remain unimpaired some tightening-up of the legislation as it affects banking should be introduced. Some recent failures have demon- strated quite hideously the dangers of having no Banking Act. It has been too easy for undercapitalised and mismanaged groups to set up as 'bankers.' I would hope that legis- lation in the future might be brought in to protect the public from this sort of abuse. It is not the public alone who are at risk—it is the creditability of the City itself.

;Confidence in government is a bigger ques- tion. Cuts in government expenditure at the expense of votes may be too much to ask. But why should an individual who overspends in- discriminately end up in Carey Street whilst a politician who does just that ends in the House of Lords? The recent electricity price rise, the renationalisation of steel and the nego- tiations over gas prices also give cause for concern. The apparent waste in these industries and the ever-increasing administrative costs .alfect every home in the country. Privately Mvned enterprises are subject to the ordinary commercial disciplines for survival. Is it too much to ask that the same standard should apply to nationalised industry?

These are some of the questions which fctreign critics of British economic policy must hkve answered before confidence in sterling can be restored. Gimmick financial management will never be a substitute for tackling the fundamental issues. This is not party politics, but bask common sense.