Saturday, January 5, 2008

Damn Banks!

The NAB recently announced that it would raise its mortgage rate by 0.12% with business to pay an extra 0.15%. Why did this happen? Did the Reserve Bank raise official interest rates? No. They’ve cited “higher funding costs” as the reason.

Last year, the NAB made $4.4 billion in cash earnings. Lending increased to $394.7 billion and deposits to $268.4 billion. Ok then, that 4.4 is pure cash earnings, separate from “assets”, which according to that statement are clawing their way back from record lows and “cash earnings” are interest generated. The bank sells money and reaps the profit via interest charged. It’s a simple equation really. So I’d like to know how the market influences that particular figure. It doesn’t seem to me that it can, so I’m inclined to say that it’s more likely that if the banks do well then the market MUST do well, not the other way around.

So it seems to me that this is purely an exercise in profit garnering. No-one’s bothered to mention how much funding costs have risen or whether it would cause significant losses if they didn’t raise rates, and considering that the NAB has a record of high “cash earning” results along with being first to raise interest rates, I’m of the opinion that they could probably have waited for quite a while before it caused the bank any real problem. The problem is though that the banks and I have a different idea as to what constitutes a loss.

To me, a loss means I didn’t make a profit, period. To a bank, $4.3 billion in cash profit instead of $4.4 billion in cash profit means they’ve made a loss and that they must do something about it because the shareholders will demand it. This ridiculous idea isn’t exclusive to banks either. I was first introduced to it when I worked for an asset management firm when during one quarter, we made a massive company record of $110 million and in the next we only made the standard $90 million. In response, our budgets were slashed, required upgrades had to be put on hold and the mailroom lost a staff member. Now to me, that’s laughable. It wasn’t like we didn’t make a hugely massive and disgusting profit or anything. I did manage to get some value out of it though when I was working on the CEO’s PC one day. He snidely complained about the performance so I pointed out that it wasn’t my idea to slash our budget. I also pointed out that his PC needed to take a lower priority because it’s the traders and fund managers that are actually making the money, so they should come first in a profit oriented firm, yes? Guess what? They had to wait so Maurice could have his new PC, laptop and phone, all paid for out of our (IT’s) budget with no expense at all, not even responsibility for the ongoing phone bill, falling to Maurice himself. Laughable in the extreme.

Shareholders are another problem. They always complain and there’s nothing you can do about it. I think it’s because most of them have nothing better to do. But I don’t own any shares at all except what my super fund may own, and that will most likely be largely eaten by fees and taxes by the time I get it anyway, so I don’t really give a toss about that. What I do care about is that my bank will soon follow with their 0.12%. Yes, I’ll still be able to make the payments so it doesn’t concern me too much. But that extra $20 a month has added up to quite a bit over the last 12 months or so. On top of that, energy has just risen by 17%, public transport by about 3%, then there’s petrol, meat, milk, veggies, etc. Herein lies the real problem and is exactly what big business and business oriented government has seriously dropped the ball on. Over time, the checks and balances that prevented profiteering have been eroded and because of it, we’ve created our own version of a “working poor”.
I’m not doing to badly, but… I don’t get CPI increases and EDS is extremely poor at giving anyone except management (above the middle level) the “performance based” increases they promise, unless you get promoted. I’ve had one promotion that netted me very little, so for the last 6 years my wage has pretty much remained static. This practice is perfectly legal and works well as a cost reducer over time. They don’t have to lay anyone off if they can save the price of a wage over the period of a year or two as job market values rise with the CPI. So people leave to find better compensation and EDS continually have their little think tanks to try and work out why they have such a high staff turnover. No, they never manage to find the answer, I kid you not.

Yet prices rise and interest rates rise and I’m already at the point where I rarely manage to save. I don’t know how long it will be, but I can see that there will come a time, probably sooner rather than later, when I will reach the point of no return and will need to find better pay. No, not a better job, just better pay. I don’t care about the job or “career” anymore, only the money I can make, that’s the corporate attitude, isn’t it? My job has a “market value” and I’m expected to make my company a profit. In that case, my skills and services are sold to the highest bidder with the best conditions. Consequently, I’m no longer and never again will be loyal to the company I work for, only ever to the pay packet they see fit to give me.

The underlying problem to all this as I see it, is that our society has simply become to profit driven. The shareholders always demand that this year’s profit is better than last year’s so companies and corporations must find a way to show an increase. Lay people off, skimp on safety and services, close the crèche, increase the profit margins and in short, generally help inflation along and make it difficult for me.

It’s time to wake up to the fact that higher profits and lower wages don't mix well. You need to pick one or the other. Higher profits mean more expensive products while lower wages mean more expensive products become unaffordable, which in turn effects profits. See the problem? The wheel turns and one man’s gain is another man’s loss and in the final analysis, that simple fact cannot be avoided, only put off for a while.

You know, when I started in the work force as a salesman all those years ago, the standard markup was 30%. That bought the stock, paid the rent and wages and made Ben Douglas (Douglas Hi-Fi) a multi millionaire with just 2 shops. These days the average markup is anywhere between 50 and 80% and in the case of slower moving items, 100% or more. That much profit isn’t really necessary and excuses like “because I can get away with” or “because the shareholders demand it” simply aren’t good enough…


Dikkii said...

This is one that I have to write about, Plonka.

The big four banks stand to make a fortune out of this, as their lending operations are not funded by securitisation, but by deposits.

By this, I mean the sub-prime lending crisis. This is already affecting small banks which do do a lot of securitisation, and has already claimed one major non-bank player in this country, RAMS.

Already we're seeing people moving to the big banks because really, they're unaffected. And therefore safe.

Naturally, supply and demand dictates that this will drive up prices a little bit, but also, that there will be some exploitation by the big banks in doing this.

The way that I see it, it will also probably mean an end to high interest saving accounts which I don't like the sound of, but then again, some of these were being maintained at the fiscally imprudent end of the scale anyway.

Expect me to do a post on this eventually. It's too tempting for me to pass up.

Plonka said...

Expect me to do a post on this eventually.

Ooh I will...:) I was expecting you to take me to task on this is one because as you know, I am woefully finacially illiterate and I've strayed way into your territory here.

Hence, the next entry. I wanted to make the point that if the little guy can profiteer so easily, you'd be completely deluded to think that banks, with teams of lawyers to help, don't do the same thing. I hope I've succeeded to some extent...

Plonka said...

Oops... I've added the link to the NAB's full year results for 2007 that I alluded to. Sorry about that...

Plonka said...

From The Age, again...

'Despite the underlying strength of the economy, Australia has not been immune from the effects of the US sub-prime crisis and its impact on global liquidity and market conditions,'' ANZ personal group managing director Brian Hartzer said in a statement.

So how true is this?

Dikkii said...

That's a good question Plonka. I'm yet to do the mental acrobatics to follow the money flows, but from memory, even the big banks need to do some securitisation of debt.

Also, the money that flows into deposits doesn't just get put there by Mums and Dads. Some of it is genuine investment on a large scale.

If people move away from investing in debt (and deposits are an example of these), then they'll invest in other things instead - like shares, property, bullion, artworks, etc.

On the other hand, the credit squeeze possibly means that cash and fixed interest investors have raised their risk assessments and are now skipping the lower quality debt in favour of higher quality debt instruments, such as deposits.

Lastly, in order to protect from future potential losses due to other fall-out from the crisis (such as, oh I don't know - a property crash, possibly), ANZ will have to tighten up their lending criteria. This doesn't pay for itself, and may in fact provide ANZ with some justfication in raising rates:

Banker: "We had to ensure that we could continue to lend to our existing customer base [and not reduce it], so we tightened our rules in such a way that monitoring is improved only."

Real hard to say, this one, but I'm ruling in favour of the finance dude just at the moment. Supply and demand on their own will force the big banks interest rates up as the smaller lenders fail. And we will see more smaller lenders go down. Watch this space.

Mandy said...

People should read this.

Plonka said...


well it seems that someone did, thanks...:)

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