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U.K. Banking: An Island of Profitability

Profit from the structural advantages that banks enjoy in this market.

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When the government sets up a commission to study the abnormal profitability of a certain industry, there's a good chance that industry has an entrenched economic moat. Such a study was set up by the U.K. Treasury in 1998 to study the extraordinary profitability of U.K. retail banks. That study, completed by Don Cruickshank in 2000, (click here for the report) suggested several measures that would transfer some of that profitability from banks' coffers back to its customers, including individuals and small-and-medium enterprises. According to a paper by Jonathan Ward, some of the measures suggested include making it easier for customers to switch banks, limiting service bundling (Microsoft anyone?), providing information on competitors' products and services, and making mandatory minimum interest payments to business account deposits. Despite these potential profit-reducing recommendations and the global downturn of 2000-02, profitability at U.K. banks is back to pre-2000 levels.

An Oligopoly
As my colleague Jim Callahan pointed out in an earlier article, we believe that nearly all banks have an economic moat. And, in our opinion, banks such as  Lloyds TSB (LYG),  Barclays (BCS), and  Allied Irish Banks (AIB) have wider economic moats than the average U.S. bank because they possess large market share within their country's oligopolistic banking markets.

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Ganesh Rathnam does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.