Thursday, 23 February 2012

Killing the goose that lays the golden egg is a global sport

As the flood of UK bankers leaving the country for Australia, , those arriving in sunnier climes may be surprised to find that they are no more popular down under than they were in the UK. Whilst the tirade against bankers led by the Coalition Trade Secretary and Chief Bank Basher, Vince Cable, has been continuous over the last three to four years, the challenge to see who can make bankers the most unpopular has been taken up by Australian politicians. For some time this has been led by Treasurer Bob Swan. Just like Vince Cable, he has been a noisey advocate that the banks are "hugely profitable" and "determined to keep that high profitability in place" at the cost of customers and staff. Unlike UK bankers the Australian bankers are fighting back. National Australia Bank chairman Michael Chaney says the bank bashing has gone too far.

"I think it's irresponsible because we are living in a fragile financial world,"  people sitting in any other Western economy who had heard the Treasurer or Joe Hockey (the Shadow Treasurer - the Ed Balls equivalent), for that matter, talking down the banks would have been incredulous. (he clearly hasn't been reading or watching any of the UK media on this topic!) I think they both understand the economic facts but have allowed their political interests to override that. "There is room for a senior politician on either side to take the economic high ground and explain to the general population that you need healthy banks to fund growth."

This point is even more true for the UK which has a higher dependency on Financial Services for the economy than Australia which at least has mining to help drive the economy. On the one hand the UK politicians have been very vocal about criticising the banks for, through irresponsible lending, causing the financial crisis, on the other hand they have been equally vocal about the banks not lending enough to stimulate the economy. No wonder bankers are leaving the industry and/or country.

In Australia the average return on equity for the big four banks is around 16 per cent. The Commonwealth Bank, which announced its first-half results on Wednesday, has the highest ROE at 19.2 per cent. UK banks would die to be able to get that return. Bob Diamond, CEO of Barclays has set a target of 13%  by 2013, but has acknowledged that that date might need to go back. RBS is targetting 12%, but is also suggesting that this might take longer to get to than anticipated. HSBC has set a target of 12-15% by 2013 but has also acknowledged that this date may slip. Lloyds Banking Group is targeting 'high to mid teens'. The challenge for the UK banks to get to their ROE targets has been made even greater by the recommendations of the Independent Commision on Banking requiring more capital to be held and the ring-fencing of customer facing operations adding to this burden.

Westpac chief executive Gail Kelly says politicians should be championing the profitability of the local banking sector, which enabled Australia to emerge virtually unscathed from the global financial crisis.
"It is unfortunate that bank bashing has tended to be so prevalent in Australia," Kelly says. "If you look around the world, it's very evident how critical it is to have strong banks and how much that leads to strong economies. "We actually want to make sure that we have a decent return on equity and above the cost of capital, which is clearly not the case in other jurisdictions around the world." Her comment referring to the ROE figures for US, European and UK banks.

"There is no real consensus on what is an appropriate level of profitability. If you assume the risk-adjusted cost of capital for the big four banks is about 12 per cent, then ROEs of between 15 and 19 per cent "might be a bit high but are not extortionate", University of Melbourne finance professor Kevin Davis says.

Whilst Australian banks are more profitable than the UK ones, Indonesia, China, Russia and India have even more profitable banks.

As Bob Diamond, the CEO of Barclays said in January 2011, the 'period of remorse and apology for banks needs to be over'. Whilst this is understandable coming from the bankers the question is isn't it time for the politicians both in the UK and Australia to put aside their partisan  populist views and get behind the banks and start promoting their critical role in driving the economies forward?

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