EYE-BALL Guru on – BANKS – WBC’s Gail Kelly the first to dig a hole …

December 14, 2011
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BANKS – WBC’s Gail Kelly the first to dig a hole …
T he recent RBA interest rate cuts and the media pressure and speculation  over whether the ‘big four’ Banks would pass on the full .25% to borrowers – have given the Banks a reason to become defensive on future RBA interest rate cuts.

WBC CEO Gail Kelly came out today and made the following statement:

WBC CEO Gail KellyUPDATE 5.14pm 14th Dec 2011:

[full story linked here]

WESTPAC has warned future rate cuts may not be passed on in full to mortgage holders as a result of funding pressures.

Westpac chief executive Gail Kelly says the European debt crisis is threatening to drag down Westpac’s revenue from its markets and treasury business putting pressure on profit margins.

The bank wants to get greater “flexibility” to deal with the problems surrounding rates – providing some support for the ANZ’s decision to set interest rates on a monthly basis regardless of the Reserve Bank’s official cash rate.

Following last week’s 48-hour delay by the big four banks over passing on the full 25 basis point rate cut, Ms Kelly said interest rate decisions must be balanced against the best policy for the bank and country.

“We are very mindful of the impacts of interest rate decisions on customers, but these must be balanced with what is economically responsible,” she said.

There is a reason for Banks to disconnect from the RBA’s monetary policy management – its called Shareholder profits. The following Graph paints a picture on Bank profits –

To gauge something more real is a chart on staff expenses as a percentage of overall expenditures – both these charts pertain to the ‘Big Four’ Banks and can be compared with the ‘Other Banks’ numbers.

[Note – the drop in ‘Other Banks’ was due to the high paying Macquarie Bank CEO jumpin’ ship and his replacement Executives having a struggle to maintain the gravy ride.]

Yes the ‘big four’ Australian Banks are very profitable – and they enjoyed the Federal Government guarantee during the GFC that gave them advantage over the ‘Other” Banks when it came to raising funds and the cost of those funds.  There is major stress throughout the mortgage market in Australia – as there is across the globe – particularly in the home borrowers market.  All Banks are cutting expense expenditures across the board – delinquency levels are on the rise – debt collectors like ‘Collection House’ and the like are being asked by the Banks to ‘cool’ the write downs on their own books rather then let them come back onto the Banks books and force Banks to write down debts against their own capital.   These are known ways to avoid realising capital losses.

The Banks have delayed passing on the RBA cut by an additional 10-12 days after the Banks agreed to pass on the RBA cut.   The 15% return on equity – [see above chart] – and the fully franked shareholder distributions make shareholders in the ‘Big Four’ Banks pretty happy.  Yet it is at a cost when RBA monetary policy is disrupted by the Banks and their profit triggers that ignite the Big Executive bonus payments.

There is a conflict of interest involved here – Bank Directors and Executives want and need profits to trigger their bonus clauses.  Their borrowers are the ones that generate the profitability when rate cuts are not passed on and Banks strive to extract every advantage by delaying rate cuts and holding back on passing on the full RBA moves.

This behaviour warrants ASIC and ACCC attention into the matter and it should become an ongoing and regularly monitored investigated.   Borrowing costs to fund long term mortgages that are lent against a variable rate – should reflect the RBA rate decreases and increases in full.  WBC CEO is the first to come out and try to break the link to RBA monetary management on these mortgages … this is a big deal – yet financial commentary on the issues at stake is limited.

True and investigative Financial Journalism in this country is at the low end of importance – take Laura Tingle from the Financial Review and the next best journo is perhaps a blogger – or Alan Kohler.  It seems that any attempt to shame Banks over their disruptive attempts to derail the RBA’s monetary policy  management, or the Treasurer’s and RBA’s obsession over inflation and ongoing cost of the ‘high dollar’ value – fails with every attempt.

WBC’s CEO Gail Kelly should be carpeted and exposed on the under current of her comments made today.  Bank CEO’s Executive salaries in the $10’s of millions is beyond the pail given the level of mortgage stress and the Banks want to maintain its profit margins.  This will be a big and continuing story all through 2012 – and when RBA rates move to the 2-3% range – how will Banks be able to hold their profit margins at the 1% level – something will give … maybe mergers, failures – and perhaps even a conscious decision by Bank CEO’s and Senior Executives to take massive pay cuts to reduce Banks costs that will deliver some rate relief to borrowers.

The Banks defense is the higher cost of raising wholesale funds in a global market becoming ever more difficult to compete in.  There is one simple answer to this – rather than risk all borrowers having to pay higher borrowing costs – Banks should reduce their dependence on offshore funding – i.e. skrink the balance sheet – and become more prudent in managing their business from resources they can rely on.  There is only one excuse for the current funding cost problems – the over extensions in Bank Balance sheets in chase of profits and shareholder returns that all lead back to the level of ‘big’ bonus payments to BAnk Executives and CEO’s.

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GuruThe EYE-BALL Guru …

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  1. Ball Shooter 2
    February 17, 2012 at 2:44 pm

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