Banks get thrashed with feather dusters

Now that the CEOs of the Big Four banks have been questioned by the Parliament’s Economics Committee it’s time to ask, what now? The Committee is a House of Representatives organ. It’s generally acknowledged that the heavy hitters for this kind of exercise are in the Senate. These mega-salaried CEOs are teflon-coated, obviously well-briefed, and it’s reasonable to wonder whether anything will change as a result of the hearings. Not much, I suspect.

David Gallagher of the Centre for International Finance and Regulation, probably a conservative outfit, says:

    The government is using the exercise as a classic case of retail political management, being seen to be keeping our major banks accountable while the Opposition calls for a royal commission into the banking industry.

Gallagher is arguing that the wrong-doings of the banks are not substantial or endemic enough to warrant a royal commission, and that our regulatory system is world-class and fit for purpose. I think he should have been listening to talkback radio over the last few days.

Moreover, a royal commission would undermine confidence in the entire financial system, he says.

This contrasts with the view of Professor Thomas Clarke of the University of Technology, Sydney.

He says:

    The banks have experienced continuous systemic risk (partly of their own making), erosion of their integrity, and a loss of public trust.

    The Australian banks are on notice that they need to renew their licence to operate, to reconnect with their sense of duty and the Australian people, and to reconfirm their responsibilities to the Australian economy.

    This will occur, even if it takes a royal commission to achieve it.


    Every other major industrial country is at an advanced stage in bank reform, and Australia would be isolated if it did not engage in a similar substantial and structural reform process.

He gives a record of the major misdemeanors and inquiries. He clearly thinks a royal commission is warranted in order to restore the confidence that isn’t there.

Still, unless we change government we will not get one. The best we can look forward to is a banking tribunal. The merits of this are considered by Anna Olijnyk, Lecturer at Adelaide Law School, University of Adelaide in a Conversation piece that also has other expert reaction. A tribunal would be more consumer-friendly than the courts, and could award compensation. However, its rulings would be subject to review by the courts. This is similar to how the Human Rights Commission operates in relation to racial discrimination. With respect to 18C only about 5% of cases go on to the courts.

Many of the straightforward cases could be resolved there, so it would have value, but is not an alternative to a royal commission.

One of Labor’s obsessions was whether anyone had been sacked. A bit simplistic, I think, and typical of the limitations of what we saw. Committee members complained of only getting 10-12 minutes each to ask questions. For the CEOs it was a cake walk.

Rodney Maddock of Monash Uni (can’t find the link) says a banking tribunal would end the populist parliamentary circus, which he thinks had some limited value, and would improve over time. He thinks the tribunal could go a long way to restoring trust with the public. The Turnbull government has announced that one will be set up, so we await the fine print.

Meanwhile, I’ll return for a moment to my obsession with false perceptions of bank profitability.

When a company lists on the stock exchange, growth is mandatory to attract investors. Even with a good yield they expect growth to at least keep pace with inflation, to preserve the value of their money.

Banks did quite well after the GFC, but growth started to dry up about two years ago. In terms of earnings per share, which is what counts, from 2011 to 2014 ANZ grew by 25%, CBA by 21% and Westpac by 22.2%. NAB had troubles and shrunk by 12%.

In broker forecasts for the next three year, ANZ are expecting -6.2%, CBA +4.3%, NAB -3.9% and Westpac 0.3%. Investors are comforted by income from dividends ranging from CBA at 5.71% to NAB at 7.06%, but there too the yields are static or going backwards.

Compare this with blood products company CSL, hospital owner Ramsay Health and toll road owner Transurban. Historically CSL grew 64.5% in three years, and looks forward to 66.2%. For Ramsay the figures are 63.1% and 40.4%. Transurban comes in at a whopping 129.8% historically (isn’t privatisation great!) and looks forward to 45.7%. Yields are lower than for the banks, of course.

Unfortunately I suspect bank managements are squeezing everything to try to maintain profits. The customer needs to be seen not as a source of profit, rather as a human being deserving quality service. If banks see customers mainly as a source of profit thewy will lose their profits as well as their licence to operate.

At the same time if shareholders need reasonable rewards, or they will go elsewhere. If they become really unhappy, the bank fails.

Bank CEOs actually have a tough job at present. Lets hope they are up to it, because the Big Four are integral to our economic wellbeing and are actually too big to fail.

28 thoughts on “Banks get thrashed with feather dusters”

  1. If you don’t trust a bank, don’t borrow from them.
    If you don’t trust a bank, don’t put your money in them.
    If you don’t trust a bank, don’t buy shares in them.

    Go elsewhere, simple.

  2. Just out of curiosity Brian, what percentage of your share portfolio is in the renewable energy sector ?
    And how’s that performing against the rest ?
    And while I’m being so bold as to ask, why not completely divest from private enterprises ( yuck ) and go into monetary exchange rates of socialist Countries ( guaranteed winner )?

  3. There are alternatives to banks for most financial services, but moving your business from a bank to another or elsewhere is not easy, as became apparent on talkback the other day.

    Jumpy, I don’t know of any public companies operating in the renewable energy space. Having been burnt by some smaller technology startups in the 1990s (it takes more than good technology to make a successful company) these days I don’t buy into companies unless they have a record of consistent profits of about $30 million pa or so. I think it’s unlikely that there will be many renewables companies operating in that space.

    I’m not ideologically against private enterprise – we need to civilise capitalism, not eliminate it. That said, I was opposed to the privatisation of the Commonwealth Bank and quite possibly still would be if the issue came up today.

    Your usual schtick about ‘socialist’ countries is boring. They don’t meet my definition of ‘socialist’ let alone ‘democratic socialist’.

    However, I believe it was and is possible to invest in China by means of managed funds. A few years ago our accountant was recommending it. We didn’t, because we thought the bird had flown and were worried about the bubble bursting if you can cope with the mixed metaphors.

  4. On a banking tribunal, I believe there already exists a financial services ombudsman, whose rulings on banks are binding, in contrast to a tribunal, where the banks could always take the issue to the courts.

    None of that obviates the need for a royal commission, which could grill bank employees further down the chain to see what the culture really is in these outfits and how profit-driven imposts by management affect day to day behaviour. Plus much else.

  5. Over time there has been increased emphasis on shareholder value compared with the concerns of other stakeholders such as customers. There has also been an increase in CEO turnover which has put more emphasis on short term thinking.
    For example, a CEO can say all the nice things he likes about valuing customers but the pressure to think short term makes using bonuses to encourage bank staff to rip off customers might be overwhelming. Ditto the strategies that led to the GFC.
    A cynic could say that a CEO that bets the company may be lucky and become a hero for a while. By contrast a CEO who doesn’t bet the company will simply go because the super funds don’t think he is performing.

  6. Some time ago I heard the average tenure of an Australian CEO was four years, which is not long.

    They usually have shares and share options as part on their remuneration package, so they do get panicky if the price goes down and have personal reasons to see it go up.

    Jumpy, the Future Fund has ploughed $400 million into AGL’s renewable energy fund. Not sure the public can. you can certainly buy shares in AGL in which case you’ll own a fair bit of dirty power, and will have profited from the power price hike in SA in July.

  7. Jumpy, thanks for the help. However they appear to be American stocks. One of my rules is to only invest in stuff where you can get a grip on the company’s story within its environment, hence I stay home. Also you’d have to invest in a bunch, for diversity and risk management. You can only do this through managed funds like Platinum Asset Management, which I haven’t done so far.

    In general terms I prefer direct investments, and only in companies that are followed by both Macquarie Wealth Management and Commsec.

  8. I applaud your capitalistic criteria, it’s what I would do.
    I also believe your capital investments do good. And people with vast amounts of capital invested do vastly more good.
    I’m sure you consider tax obligation amongst your investment criteria, as do they.

  9. I’m sure also that you would shy away from franked dividends on the moral grounds that Corporations avoid/evade tax rightly owed to the people.

  10. Jumpy, you’ve got the wrong story on franked dividends. Dividends are franked when the corporation has already paid tax the the Federal government at the company rate.

    The company tax paid is then added to your taxable income, and taxed at your personal marginal rate. Then the tax already paid is substracted from the tax you owe, to save you being taxed twice, once as a part owner of the company, and once in you own right.

    When companies like CSL pay unfranked dividends, it is because much of their operations are in other countries, and they pay tax, presumably, where they earn it.

    The big banks all pay fully franked dividends because they literally pay billions of dollars worth of tax to our government.

  11. The big banks all pay fully franked dividends because they literally pay billions of dollars worth of tax to our government.

    So they pay their fair share, someone tell the ALP/greens.

  12. Yes, Jumpy, someone should tell the ALP and the Greens. If they are after taxing superprofits they should go for companies that are superprofitable, not just the biggest pile of money. Part of the point of the post was to show that the banks are not in fact superprofitable at present.

    One of the problems is that the only place profits can come from is the customer. Banks are struggling to maintain their profitability and are squeezing the lemon, unfortunately at times in ways that are by any measure unethical.

  13. One of the problems is that the only place profits can come from is the customer.

    Not at all, profit is the difference between cost of production and the value customers are voluntarily willing to pay based on their individual circumstances.

  14. Jumpy, in the end it’s customers paying. That’s what I’m saying, that’s what you’re saying.

    If there is a variation from that it might be governments subsidising.

  15. Jumpy, in the end it’s customers paying.

    No, I’m saying that should be the case, too often the customer has someone else paying involuntarily.
    It’s not just the low/zero income welfare recipients, there are legitimate humanitarian reasons behind this.
    To give an example, it’s Bathurst races today.
    Should someone that never owned a Ford nor watched the race have money they earned taken involuntarily out of their pocket to put into the manufacturers and drivers (and everyone in between including shareholders) pockets to lessen the burden on advertisers of goods ?
    Of course not. But Government does this.

  16. Brian: You seem to be mixing the idea of return on capital and return on shares. I have no idea what the return on capital is for banks and I imagine that for banks “capital” is a bit fuzzy given that a major part of their business is acting as a defacto agent for the people they borrow from.
    In terms of return on shares I would expect that it would be low since most of their activity is relatively low risk compared with some other businesses. (Then again the GFC showed that some banks were running much higher risks than people realized.)
    I guess my beef with banks and their shareholders is that the demand for profit growth has driven banks into some pretty murky places driven in part by a bonus system that encourages bank employees to act in ways that are definitely not in customers interest or their expectations. My other beef is that they can change fees with little risk of losing customers as well as make questionable insurance decisions.
    BTW I don’t agree that companies earning large amounts should pay more per unit of profit that smaller companies and that some people think high asset companies have a bottomless pot of gold.
    On the other hand I think that Australia should get a reasonable return on non-renewable commodities that mining companies sell even if this means that the mining companies will lose money if they insist on selling at prices that will not give them a profit.

  17. John, I agree with most of that, but with respect I’m not confusing anything. I’m obviously not communicating. ‘Return on capital’, ‘return on investment’ and ‘return on equity’ are three standard measures used by share analysts and given in tables. In the case of banks they don’t use ‘return on capital’, they use ‘return on assets’. The categories are a bit arcane, and are probably more relevant in comparing companies in a peer group.

    Banks, FWIW, the ROA is low, 1% for Commonwealth Bank, but 10% for ROC for Ramsay Health and 20% for CSL. Share analysts always say the ROE is the important one, but it is still a bit arcane for the investor.

    If you put your money in a term deposit you’ll get low single figures in interest, pay tax on every dollar, and the amount you invest will stay the same in nominal terms. In fact in real terms it will lose value through inflation. It’s a mugs game.

    If you invest in the bank shares, you’ll get a dividend, in the case of CBA it’s currently 5.73% and for NAB it’s 7.03%. Growth, risk and yield are all reflected in the price. NAB is considered riskier than CBA and there is less growth anticipated, so the price goes down and the yield goes up. For now.

    If you invest in CSL with a strong record of growth and good prospects, the dividend yield is only 1.51% (unfranked) and for Ramsay it’s 1.51% fully franked. Franking is also reflected in the price.

    Prospective yield and growth is what the shareholder looks for. I tabulate the 3-year forecasts on a spreadsheet and have a column with an imbedded formula that gives me a score for three years of dividend yield plus growth. For CBA it’s 22 and for CSL it’s 70. I reckon 25 is about par – three year’s yield at 5% and growth to keep pace with inflation. Currently the risk is probably higher for CBA than it is for CSL or Ramsay, because there’s been talk about the banks’ ability to maintain their dividends. If the dividend goes you can lose up to half your investment worth or more in the blink of an eye as the price takes a dive, certainly faster than you can sell, unless you act now while it’s still good. But then you lose 30% or whatever in capital gains tax.

    It’s a mugs game, and I don’t recommend it.

    Commseq have information in what’s known as ‘total shareholder return’ for 1yr, 5yr and 10yrs. It includes historical dividends and capital growth (increase in share price) combined. For Ramsay the 1yr is 31.2% and the 5yr is 31.2% per annum. For CSL it’s 15.3% and 32.1%. For CBA the 5yr figure is a nice 14.8% per annum, but the 1yr figure has fallen to only 2.8%. That’s because the banks have been doing badly and the price has fallen.

    Every shareholder knows it. If pollies invested in shares instead of houses they would know it too.

    Investing in houses is a mugs game too, because it’s a lot of trouble, and we’ve got a real estate bubble.

    Just appreciate what your superannuation fund manager does for you. For some that will be a bank and they’ll do quite well in general.

  18. Well, Jumpy, I guess we all worry about things we can’t do anything about.

    But climate change is not one of them. Every little bit helps!

  19. I was thinking about that today Brian.
    You’re very good at math and have all the info ( i’m not so good and google terribly ) so I thought I’d ask you the answer.
    Hypothetically, I gained a superpower today the allowed me to vaporise every single Australian to prevent co2 emissions, then myself ( not a death or suicide threat ), how much co2 emissions would that prevent ?
    And how many days would the rest of the Worlds emission growth take to surpass that reduction ?

    My rough calculations say about Monday week.

  20. Opps again, I ignored the topic, please move it to a CC if you want or delete and i’ll repost.

  21. Jumpy, the discussion goes where it goes, so we can do it here.

    I can’t be bothered doing the calculations, because we know that what we put out is less than 2% and you are probably right about Monday week.

    However, as a country we are in the top 20 emitters. Most countries apart from China, India and the US don’t amount to much by themselves. But if everyone thinks that their little bit doesn’t matter it’s a disaster.

    And a country is made up of individuals, who can act in their own sphere.

  22. So,

    Jumpy, perhaps you should worry about things you can control or influence!

    doesn’t apply on the issue of Government overreach/ineptitude /corruption in trade.
    Fine, but I still should do my bit.

  23. In the end it’s a free world, and you can worry about what ever you like.

    OTOH we are all in this together, and yes, you should do your bit.

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