The Snout/Trough Index 2008

A couple of weeks ago I was reluctantly compelled to point out that NAB’s 2008 Financial Report contained a 19 page remuneration report, which constituted a massive 63% of the Directors’ Report.

I now see that ANZ has put them to shame – the 2008 Annual Report includes a whopping 22 page remuneration report.  This makes up 85% of the total Directors’ Report.  That’s right – they spend 22 pages talking executive pay and 4 pages talking about everything else.

That’s what I call getting your priorities right.

For the sake of completeness, here’s the 2008 Snout/Trough Index:

Bank	Remuneration Report pages	Remun Rpt as % of Directors’ Rpt
ANZ	22	85
CBA	20	74
NAB	19	63
WBC	17	68

Hola! Australian and Spanish banks beat the world

Gidday!  Que?

In a Winnie Blue & Gazpacho fuelled triumph, banks in Australia and Spain have scooped the pool as the world’s most profitable, according to a paper by the esteemed Boston Consulting Group.

The paper entitled “Creating Value in Banking 2009 – Living with New Realities” looks at a variety of performance indicators over the period 2004-2008.  This one caught my eye in particular:

 

It seems that the Aussie and Spanish banks in averaging around 16% ROE over 2008 have left the rest of the world in their dust.  But I’ll reiterate the issue I raised earlier – namely, if Govt bonds are sitting around 6% (before tax) and banks are earning 16% (after tax), does this imply a 10% risk margin?  What does this say about the nature of the risks being run to generate that 16% return?

Deckchairs Overboard

Nice piece by Paul Krugman here, questioning how useful the US Govt’s shuffling of equity between preferred and common stock is likely to be.  This graphic illustrates how simple the problem is for a number of the US banks:

A neat summation too: “I just don’t get it. And my sinking feeling that the administration plan is to rearrange the deck chairs and hope the iceberg melts just keeps getting stronger.”

Keynes Mark II and Banks’ ROE

Another good piece in today’s AFR, this time by Robert Skidelski, about the nature of the failure the financial markets are now experiencing, and what this means for the future. This snippet gives you an idea where he’s coming from:

But the crisis also represents a moral failure: that of a system built on debt.  At the heart of the moral failure is the worship of growth for its own sake, rather than as a way to achieve the ”good life”.  As a result, economic efficiency – the means to growth – has been given absolute priority in our thinking and policy.  The only moral compass we now have is the thin and degraded notion of economic welfare.  This moral lacuna explains uncritical acceptance of globalisation and financial innovation.

This bit alone raises some interesting issues, not the least being that lacuna is a great word and one we should use more often.  But seriously, who is to blame for all this?  One thing I’ve tried and failed to comprehend over many years is what it is that’s driving the banks, because surely that’s the direct cause of the financial crisis, regardless of whatever shortcomings the regulators, ratings agencies and central banks may have had.

This table shows the returns on equity achieved by the big four banks in Australia since 1998, compared with the average 10 year bond rate for each of those years.

	2008	2007	2006	2005	2004	2003	2002	2001	2000	1999	1998	Avg
ANZ	14.5	20.9	20.7	18.3	19.1	20.6	21.6	20.2	19.3	17.6	14.6	18.9
CBA	19.8	20.7	20.4	18.2	12.5	10.7	14.7	13.5	22.1	20.5	18.5	17.4
NAB	14.3	17.1	17.7	15.0	15.8	18.3	17.0	18.4	18.1	17.3	17.8	17.0
WBC	23.1	23.5	23.0	21.7	19.9	19.2	21.7	21.1	18.4	16.8	14.7	20.3
10Y GOVT	6.1	5.9	5.5	5.3	5.7	5.3	5.9	5.7	6.5	5.6	5.8	5.8

I realise that the basis of preparation of these numbers varies by bank, but the fundamental question remains: why do banks seek (and achieve) a return on equity of 15-20% (and that’s after-tax) when the risk-free bond is yielding 5-6% (and that’s pre-tax)?  I’d hazard two points on this:

• If the risk premium is really that big, should such risky institutions be allowed to form the cornerstone of our economy?
• If the risk premium isn’t really that big, why do the banks feel it’s their responsibility to deliver these returns?

Given the way our banks are capitalised, managed and regulated I don’t think for a moment that the risk premiums embedded in these returns are warranted.  But what would happen if one of the banks actively targeted an ROE of 10 or 12%?  Presumably their shares would be dumped.  So is this what it all boils down to – institutional investors demanding such high returns from banks that they’ve turned themselves into casinos to generate those profits?

I’ll keep pondering!

Unhealthy Obsession

I just stumbled on an interesting snippet from the NAB 2008 Financial Report:  

  Note that the remuneration report takes up a whopping 19 pages, or 63% of the report of the directors.

How does this stack up with the rest of them?

Might be worth mapping this unique KPI over the last few years.

Job Losses – Making Grim Look Grimmer

I’ve seen this graph bob up in a couple of places over recent days – it’s pretty alarming as it shows job numbers in the US falling off a cliff when compared to job losses in previous recessions.

However, it fails to account for the increase in the size of the US economy between those dates, and more to the point the increase in the number of jobs.  Rather than comparing the drop in job numbers in absolute terms it’s obviously more appropriate to look at the drop in percentage terms. 

 

It’s still scary, but has less of an Armageddon feel to it than the top graph.

Masters of the Universe

Today’s AFR has a nicely worded piece by American academic Harold James entitled “Superbanks are not economic visionaries”.  Following a bit of a history lesson James concludes as follows:

…even for the US, the notion of a world held together by Citigroup’s business plan is simply too costly.  There is a danger that in the push to nationalise banks as a consequence of the financial crisis, governments will see it as their duty to implement strategies .

The strategic vision of a bank shaping the economic fortunes of a country, or the whole world, is as flawed as was the idea of central economic planning.  In this sense, 2007-09 is the capitalist equivalent of the communist demise of 1989-91.

James’ article reminded me of Tom Wolfe’s classic The Bonfire of the Vanities, and the “masters of the universe” who were in fact anything but.

Gottliebsen was Spot On

Robert Gottliebsen, writing in the Business Spectator yesterday, made comment on the unique way in which government is pressuring the banks to pass on cuts in the official cash to their home loan borrowers straight away and in full, while no mention is made of how and when rates are cut for the biggest employer in Australia, the small business sector.

The RBA’s Statement on Monetary Policy issued today not only bears this view out, it reinforces it.  The Statement devotes considerable space to the topic of how well Australian banks have done in passing on rate cuts to home borrowers, in comparison with banks in a number of other countries (who have by and large retained huge margins for themselves).  Alas for small businesses around the country (and by extension the people they employ, the people they might have employed and the people they used to employ) the story hasn’t been so kind, as the following extract from the Statement shows: