The banks sector was the sixth largest contributor to R&D in the UK850 and the 16th in the G1400 in 2007
- None of the top 25 R&D investors globally is a bank.
- Three banks are, however, amongst the top 25 UK investors in the UK850: they dominate R&D spend in the UK banks sector accounting for 87% of the sector total, and 4% of UK850 spend.
- Only two other banks are part of the UK850 making five companies in total.
- R&D spending by banks continues to grow more quickly than sales amongst the largest investors.
This summary provides a brief overview of R&D expenditure by companies within the banks sector based on the data which underpin the 2008 R&D Scoreboard. It:
- describes the broad features of R&D in the sector;
- explains the pattern of R&D both in the UK and globally;
- identifies the leading investors in the UK and globally; and
- highlights key trends in R&D spend by the sector
The banks sector
The only type of R&D capitalised by banks is investment in the
development of internally generated software which underpins their
business systems. Banks do not generally capitalise their R&D due to
the nature of the sector which does not encourage the development
of proprietary products since they offer little as a source of sustainable
competitive advantage. Instead, they typically derive competitive
advantage from brands, reputation, customer relationships, market
positioning and the skills of management and staff.
The high degree of concentration of UK banking R&D is a reflection of
the fact that the R&D capitalised by banks relates purely to internally
generated software. Modern banking requires huge and complex IT
systems, but, in the UK and elsewhere, the sector typically prefers to rely
on external suppliers rather than in-house development. Consequently,
relatively few banks invest significant amounts in software development.
The pattern of R&D expenditure
Amongst UK firms
Overall, UK banks invested £1.0 billion in R&D, making it the sixth largest
sector in the UK850. Spending on R&D by UK banks is heavily skewed
towards the large listed banks which account for 87% of total R&D (see
Table 1). In large part this reflects the relatively concentrated structure of
the UK banking industry. The five largest UK banks - Barclays, HBOS, HSBC,
Lloyds TSB and Royal Bank of Scotland (RBS) – collectively held UK market
shares of more than 80% for many UK retail and commercial products.
Compared to the UK850 as a whole, the intensity of UK banking R&D is
low. This reflects both the restricted nature of banking R&D and the large
scale and strong profitability of the banking industry. R&D as a percentage
of sales (or, for banks, net revenues) is 1%, just over half the UK850
average of 1.8%. Furthermore, the banks’ high profit margins mean that
R&D as a percentage of operating profits is 3.2% compared to a UK850
average of 13.4%. The large employee bases of the major UK banks also
means that R&D per employee is less than half the UK850 average.
Global levels of banking R&D intensity are comparable to the levels seen in the UK. Banking R&D in the G1400 was 2.8% of operating profits and 0.9% of net revenues in 2007, compared with UK figures of 3.2% and
1.0% respectively.
Table 1: The UK banks sector – key facts
Globally
In 2007 companies from the banking sector invested £1.6 billion in R&D, equivalent to 0.7% of the G1400 R&D spend.
The top ten companies accounted for 86.5% of total R&D spending in the sector. Although this owes something to the concentrated nature of banking sector in several European countries, including the UK, it is chiefly attributable to the specialised nature of banking R&D. The reliance of most banks on external IT suppliers for all their hardware and software needs means that fewer than twenty banks reported enough capitalised R&D spending to put them in the G1400 in 2007.
Furthermore, all the banks among the G1400 reporting R&D were headquartered in Europe. In particular, the absence of any banks from the large US market was striking. This reflects the relative ease of capitalising internally generated software under IFRS rather than the absence of US banking R&D. The requirements under US GAAP are more stringent, as they were under many former European accounting regimes. It is, therefore, possible that differences in accounting conventions distort the global picture of banking R&D.
The major firms
In the UK
R&D in the UK banking sector was dominated by three of the five largest banks: RBS, HSBC and Barclays were all amongst the 25 largest investors in R&D, and together they accounted for 87% of UK banking R&D. Conversely, two of the other large UK banks - HBOS and Lloyds TSB - did not report any R&D in 2007.
The only bank outside the FTSE 100 reporting any UK R&D is the UK subsidiary of the National Australia Bank, a large listed Australian
banking group.
Table 2: The top five UK investors in R&D in the banks sector
Globally
RBS and HSBC were not only the UK’s two largest banking investors in R&D, but also the global leaders by some margin. The two accounted for 39.4% of total banking R&D within the G1400. Neither, however, was amongst the largest global investors: RBS was ranked 112th and HSBC was ranked 170th.
The remaining three positions in the global top five banks by R&D spending were all occupied by major Eurozone banking groups, specifically Societe Generale, Fortis (replacing Rabobank) and Intesa-Sanpaolo. The absence of large US banks from the global top five may partly have reflected the requirements of US GAAP, rather than an absence of investment in software development.
Table 3: The top five global investors in R&D in the banks sector
Trends in R&D expenditure
In the UK
For the five UK banks reporting R&D spending within the UK850, net revenues grew by 15.0% over the last year, with R&D expenditure growing by 18.9%. In comparison, the non-UK companies within the G1400 experienced a decline in net revenues of 2.2% and R&D spending expansion of 23.4%. However, the absence of any disclosure about the nature of the banks’ internally generated software makes it impossible to verify the purpose of these assets and the drivers of R&D growth.
Globally
Amongst the G1400, R&D spending by banks increased by 20.7 % compared with the previous year whilst net revenue grew by 5.5%.
This represents a slowing in the rate of expansion of R&D compared to last year’s Scoreboard, which showed R&D and net revenues increasing by 36.5% and 14.7% respectively during the period. Four year growth rates cannot be calculated for the sector since there was virtually no
R&D expenditure reported by any of the banks prior to the introduction of IFRS.
