Banks cry poor? tell ‘em they’re creaming it
There has always been a debate about the origin. Was it Richard Nixon, his general counsel Chuck Colson or an adviser, a former Vietnam veteran, who supplied them with the quote?
Time may have obscured the authorship but it has done nothing to diminish the immortal line: ”When you’ve got them by the balls, their hearts and minds will follow.”
It pretty much sums up the attitude from our big banks right now, all four of which assume they have the divine right to maintain profit margins and record earnings regardless of the economic climate.
If you want to know the classic definition of a monopoly, it is thus: a corporation that prices its output on a ”cost plus” basis.
The mindset is: here are the costs, this is our required profit margin, and therefore you the consumer will pay. How can they achieve this? Because they can. It is the kind of philosophy only possible when there is no real competition.
But wait, there’s more. If things turn nasty, as a banker you also have the right to run to Canberra and demand taxpayers bail you out, pick up the risk and insulate you from the nasty fallout of a global environment into which you willingly plunged yourself to earn bigger profits and massive bonuses in the good times.
There really is no other business like it. Even after being outed as the architects of the financial crisis into which we plunged three years ago, bankers – including our own – have elevated the old agrarian philosophy of ”capitalising your profits and socialising your losses” to an art form. Now they are at it again.
Perhaps, like me, you have been labouring under the misapprehension that it was the Reserve Bank of Australia’s job to control monetary policy in this country.
Call me old-fashioned, but I was always taught that it goes like this: a central bank will cut interest rates to stimulate demand during soft times and raise rates to curb runaway demand and inflation when growth gets out of hand.
Clearly, that’s not the way our bankers see things. To them, an official rate movement has nothing to do with economic management but is simply an opportunity to gouge customers, to plump up the margins and create the foundations for another round of record earnings.
The new rules are that if the Reserve raises rates, well, why not whack a premium on the top. When the Reserve cuts them, don’t pass on the full cut. That’s the way it has been for the past three years, a consistent pattern of behaviour where ”higher offshore funding costs” always seem to override the economic imperative.
Highlighting the hypocrisy is that the margins only ever move in one direction. When was the last time a bank announced a rate cut because funding costs had dropped?
So ludicrous has the situation become, there now is a shock value attached when banks pass on a full cut, or don’t whack a premium on a rise. There will be no such shock this time around. As the Cone of Silence descended over the big four yesterday, the questions were: Who will jump first? How much of the rate cut will they keep?
During the past three years, our banks have added the equivalent of close to five official rate hikes to their interest rate settings.
That is why their net interest margins have moved back to pre-crisis levels, something the Reserve has documented.
If you check out their latest results, the average margin among the big four is 2.28 per cent, which is about 2007 levels.
Within that band, the Commonwealth comes in with the skinniest margin at 2.19 per cent and the ANZ scores a fat premium of 2.46 per cent with the other two, Westpac and the National Australia Bank, sitting neatly in between.
And despite their bleating, our banks wallop their offshore competitors when it comes to return on equity. The official figures reveal a 16.3 per cent return. Compare that with a global average of just 6.33 per cent. American large banks are below the average with a 5.7 per cent return while those in the euro zone last year managed 8 per cent.
No one would wish our financial institutions to be in the same predicament as their developed world cousins, but the undeniable fact is that our banks are creaming it. Just look at the earnings. Year-in and year-out, all four continue to smash their records.
The banks counter with a predictable argument. Forget the profit figures, they say, our returns are tiny compared with the size of our assets. Que? Why, of course they are. Banking is a high-volume, low-margin business. Their assets are the loans they dole out to us. They raise that money from depositors and wholesale markets, clip the ticket and offload the cash to borrowers.
You can’t compare that to building a mine, a steel plant or spending years developing software for a high-tech business in the hope of getting a return years down the track.
There is no doubt that the crisis in Europe threatens global finance. Equally, the cost of raising cash on wholesale debt markets has soared in recent weeks. But that hasn’t affected their entire funding base. It affects only the tiny proportion of their $2 trillion in offshore loans that are falling due now and the new loans they are writing.
Remember too that there are virtually no costs associated with established loans. It takes just two years to recoup the establishment costs on a 25-year loan.
But if home owners bitch about their treatment by the big four, think of the plight of small- and medium-size businesses. Out of the glare of public opinion, and without the clout or the alternative offshore financing arrangements available to major corporations, small businesses are over a barrel. Last month’s rate cut still hasn’t flowed through to most of them. This month’s is likely to simply disappear into the ether.