I see that Bloomberg reports that the accounting standards people in the US (FASB) are being “pressured by lawmakers” to change the fair-value rules which are “blamed for worsening the financial crisis”. Apparently this will enable “significant judgment” to be used instead of slavishly following market prices in cases where lack of liquidity renders those prices useless.
Hopefully some common sense will prevail but I’m not holding my breath.
See the story here.
The December ‘08 update of the tipsters league table showed that Westpac had come from nowhere to take the lead, overtaking ANZ (which had held the lead since August ‘07) and my team (which had previously led all the way back to August ‘01). It’s worth noting that as recently as December ‘07 Westpac were stuck on the rails in second last position.
So why the dramatic improvement for the Bill Evans-led team at Westpac? Essentially it boils down to the speed with which they recognised that serious problems were afoot and big monetary policy initiatives would be needed. Bear in mind that as recently as May ‘08 several forecasters were calling a 7.50% cash rate for March ‘09 (ANZ even more so – see below), implying another 0.25% rate hike on the then-current rate. Westpac were predicting a 7.25% rate at that time – a massive 4% above the actual result, but still better than the consensus view. As economists lowered their forecasts over the rest of the year Westies were consistently at the bottom of the range, and are now reaping the benefit:
So what happened to ANZ? As recently as September ‘08 Saul Eslake and his team were leading the league – they’ve now gone so far back in the running that a steward’s enquiry might be warranted. The reason for this form reversal stems from mid-2008, when ANZ’s forecasts had the biggest variance to actual results we’ve seen since we started tracking this stuff in 2000. ANZ’s forecasts at that time versus actuals look like this:
| Jun ‘08 | Sep ‘08 | Dec ‘08 | Mar ‘09 | |
| Forecast | 7.25 | 7.50 | 7.75 | 7.75 |
| Actual | 7.25 | 7.00 | 4.25 | 3.25 |
This makes an average absolute differential for the four observations of around 2.13% (a record high) – not bad when you consider that the June ‘08 result was virtually a given when these readings were taken.
Note that we don’t expect the record differential of 2.13% to hold up for very long – if Westpac’s forecast of a 2.50% cash rate by June ‘09 comes to pass the average differential on ANZ’s July 2008 forecasts will be a massive 3.44%, at which time we may bypass the stewards and go straight to the trackside veterinarian.
Hopefully they’ll publish the papers from this thing, as there’s one or two items that we’d like some clarification on, such as:
The first day of the conference generated some very astute observations from a couple of ANZ heavies who were present:
Mike Smith, CEO. "Banks should be boring," Mr Smith said. "Banks have got quite interesting recently and they shouldn't be in that space."
Ian MacFarlane, Director. Mr Macfarlane said banks in Europe and the US were inadequately regulated, and resorted to increasingly risky measures to boost profits because they constantly feared being taken over by their rivals. Australian banks did not have to aggressively chase risk to the same extent because they were protected from being taken over, he said. This point relates to a (unintended?) consequence of the four pillars policy, which prevented consolidation among the top four banks.
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 |
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?
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.”
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:
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!
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.
