The new bank in Hampshire underpinned by £15m of Portsmouth taxpayers' cash
A COMMUNITY bank underpinned by £15m of Portsmouth taxpayers’ money is hoping to win approval from regulators.
Portsmouth City Council is one of eight founding investors in Hampshire Community Bank and last September agreed to give it a £10m loan.
The fledgling financial institution is currently making submissions for a banking licence to regulators – and hopes to provide an alternative to the big five banks in the UK.
The five-year £10m loan – needed so HCB can prove it has the cash to lend out – comes after the city council agreed to put £5m into the project in 2014 to help establish the bank.
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Those backing the project in 2014 – and who agreed to pay in £8m in total – also include Eastleigh Borough Council, Winchester City Council, the University of Portsmouth and the University of Southampton.
It’s hoped the bank will lend to small to medium enterprises with ‘strong ties’ to Hampshire.
Some firms have already received loans as the bank does not need a licence to lend to companies.
City councillors agreed in September when they signed off the cash that they wanted a progress report every six months from bank bosses.
But nine months on the governance committee - which was supposed to receive the report - has not been sent any such report.
Vice-chair, Tory councillor Simon Bosher, said it was frustrating the council leadership had not ensured this happened.
He said: ‘Certainly we’ll be putting it under the microscope because we’re talking tens of millions of pounds of taxpayers’ money they’re playing with.
‘They run the risk of it becoming a white elephant if they’re not following the governance.
‘It’s going to be pretty difficult with the pressures on the council from the Covid pandemic. We’ve got to be watching every single penny and clearly the administration is not doing that.’
The council said the six-monthly report was meant to report on any lending activity after the loan was agreed. A spokeswoman said ‘there is not as yet six months lending activity’ on the loan - so there is no report.
Professor Richard Werner, chairman of the bank board, told The News: ‘While the funding was agreed by PCC in September, no funds have unfortunately been paid out so far.
‘It is our understanding that any report relates to the use of funds lent to the Community Bank, and is intended to ensure the use of funds is in line with PCC requirements.
‘As nothing has been lent to the community bank by PCC, there cannot be a report yet.
‘Needless to mention, we are eagerly awaiting disbursal of the funds.’
The bank is currently submitting its licence bids to the Prudential Regulation Authority and the Financial Conduct Authority.
Portsmouth City Council is major shareholder
Portsmouth’s £5m capital investment means the council is a founding investor and shareholder, whose finance director Chris Ward sits on the board.
It’s envisioned that 50 per cent of the bank profits will be allocated to a grants board, and split on charitable grants, donations and disbursements.
With the council’s investment, it means it has five of the 13 votes on the grant board.
The remaining 50 per cent of the distributed bank profits will be paid out to shareholders as a dividend. The council holds 62.5 per cent of the shareholding - so would benefit.
Portsmouth council said its £10m loan to the bank is on commercial terms, so it gets a better return than otherwise available through other investments.
Around 50 per cent of loans will be paid out to businesses with a PO postcode, a city council statement said.
The bank’s work should contribute at least £20m directly to GDP, and bring in £6.35m in local and national taxes, a council report said.
Asked how confident the council is on not losing its cash in the scheme, a statement said: ‘Throughout the bank authorisation process all shareholders have been provided assurance related to the prospects of obtaining bank authorisation, and the strength of the bank's business plan and operating policies by banking experts BDO LLP.
‘Prior to the release of any tranches of capital investment by shareholders a report is required by BDO, which satisfactorily concludes that the bank is capable of achieving authorisation.’
A bank spokesman told The News: ‘Currently, all our staff are engaged and working hard to submit the application to regulators.’
Customers already putting cash to use
Testimonials on the bank's website tell how it is already supporting customers.
The bank’s loan portfolio was set up in 2016 with a Regional Growth Fund grant of £950,000, and was administered by Local First Community Interest Company – with Eastleigh council being responsible.
By March 2017 it had already dished out £1.145m in loans to 13 companies, largely in Winchester and Eastleigh.
All but one debtor paid up. The one who did not went bust, causing a £46,000 loss to Local First CIC, which had been administering the loans.
In February 2019, Eastleigh council moved its Green Growth Loans to HCB.
Around 115 jobs have been created through the use of funds loaned out, with 156 jobs retained.
Among the companies to receive a loan is Turbulent Simulations based at Langstone Technology Park in Havant.
The company boasts the Royal Navy, Lockheed Martin, Microsoft, BP and Royal Caribbean International among its clients.
Director Trevor Linn said when it needed a loan in 2016 ‘the community bank was the only bank at that time that would back us to remain in business’.
In the testimonial he added: 'Since our first loan we have expanded and repaid the first loan now.
'Turbulent have developed the site and have expanded into new markets designing and visual systems for sensor reading and have a client range from Lockheed Martin, BP, Royal Caribbean to name just a few.
'Covid-19 has hit our market hard and Hampshire Bank has been excellent for helping our company. They contacted us to see if we wanted to pay interest-only to keep our cash flow in good shape. This has been a blessing.
'Now we are looking forward to… when we all hope the market will come back and we will be ready to move forward again.'
July 2014: Portsmouth cabinet agrees £5m investment
February 2016: Investors join the board of HCB.
December 2018: First submission to regulators Prudential Regulation Authority and the Financial Conduct Authority.
April 2019: Feedback meeting with the PRA and FCA
July 2019: Another application to regulators
August 2019: Second feedback meeting with regulators
April 2020: Submission so the bank's capital and liquidity adequacy can be assessed.
August 2020: Completion of regulators’ ‘challenge phase’
Paid at £1,000 per share
5,000 - Portsmouth City Council
500 - Eastleigh Borough Council
250 - Winchester City Council
500 - Test Valley Borough Council
200 - University of Portsmouth
100 - University of Winchester
400 - University of Southampton
100 - Southampton Solent University
950 - Local First Community Interest Company
Why is a community bank needed?
Hampshire Community Bank’s board chairman Professor Richard Werner is an economist and proponent of small banks.
His research has found smaller banks can boost countries’ economies.
He told The News: ‘Since the 2008 crisis it has become clear that UK small and medium-sized enterprises are not serviced well by the banks in the UK.
‘My recent research has demonstrated empirically the principle that this is due to the UK banks being too big.
‘Big banks want to lend big amounts to big companies. It is only small banks that lend to small companies.
‘At the same time small companies are key for job creation and economic growth: they account for two thirds of all employment.
‘This explains why countries with many small banks have very strong economies, namely the US, Germany and China, each with several thousand banks, most of which are very small local community banks.
‘On the other hand, countries with a small number of big banks dominating the banking system, such as the UK, where the big five account for almost 90 per cent of all deposits, have weaker economies, weaker exports and weaker job creation, because such big banks are not interested in lending to small firms – it makes no economic sense to them.’
He added: ‘So to boost jobs and economic growth and create prosperity, we need to establish local community banks, which have been at the core of the economic success in the US, Germany and China. When the UK had high economic growth, in the 19th century, there were over a thousand banks! Today it is only about 350, of which almost half are international banks in the City, with miniscule domestic market share. Essentially five banks dominate the domestic market.’