Recently the Commonwealth Bank declared a record half-year profit of $3.576 billion, raising the usual chorus of protests about greedy banks, favouring shareholders over the interests of customers and bank employees.
As a shareholder it does not give me any joy if banks are shedding employees, raising interest rates out of step with the Reserve Bank and exacting outrageous charges for withdrawing cash etc. I have a significant bank loan and am a bank customer too.
Today, however, my mission is to inform you how I fared as a shareholder as a result of this record profit.
Firstly, the net profit in terms of earning per share (eps) went up from $2.14 to $2.27. That’s an increase of 6%. I look for inflation plus about 5%, so the result was reasonable, given that results in this reporting period so far have been pretty ordinary. But no reason to crack open the champagne.
The dividend per share (dps) is what I get. The dps went up from $1.32 to $1.37. That’s about 3.8% or a tad above inflation. Pretty much marking time.
If I’d invested in Domino’s Pizza, which reported on the same day, the profit of $12.6 million attracted no attention. What did rate a front-page story in the Fin Review was a whinge by former delivery boy and now global chief Don Meij about Australia’s workplace laws which “are hurting productivity and making the nation uncompetitive.” There was a photo of current delivery man Davdeep Handa who delivers over 100 pizzas in a night for $15 to $20 an hour, but no comment or complaint from anyone about outrageous profiteering. Yet the eps rose from 14.9c to 18.2c, or about 22%. The shareholders were rewarded with a dps of 13c up from 10.4. That’s an increase of 25%.
It’s interesting that the Commonwealth Bank is trading on a yield of 6.52% fully franked, whereas Domino’s is yielding only 3.14%, also franked. The market is rating Domino’s more highly that CBA as an investment.
Commonwealth Bank has been a good investment over the years. Having bought some in the float in 1991 at $5.40 it’s now almost what they call a ten-bagger. During the GFC the CBA was one of the few stocks that did not reduce its dividend. It just paused and then increased again, last year by 10%.
So I would say to you the truth is not in the big numbers. Rather it is in the relative movement of the eps and dps.
I would also say to you, we need banks and if we didn’t have reasonably happy shareholders…, well, the government would just have to buy the thing back, or we’d all have to get together and start a co-operative or something.
Thanks for injecting some perspective into the debate. Banks make large profits because they are large businesses. In relative terms the return on capital is modest. The profits flow to investors (ie humans) via direct share ownership or via other holdings such as superannuation funds. If you want a slice of the action buy some shares.
We should be pleased we have a healthy banking sector. The major reform we need in the banking sector relates to regulatory barriers to entry. We need to open up the market more.
The salient issue here is that the GFC impacted most severely on banking systems with “light touch” regulation. More heavily regulated systems like Canada’s or Australia’s coped well and did not cost the taxpayers hundreds of billions to bail out the unregulated financial suicide bombers who threatened to blow the world if they failed to extort public monies.
There may exist an intelligent scheme of deregulation. But it doesn’t exist yet. And who would want a repeat of the GFC to test some untested and unpopular libertarian scheme. That would be sheer foolishness.
If libertarian parties ever attract more votes than the Greens, then perhaps discussion of their nostrums would then be almost as relevant as it is now amusing.
I have no problem whatsoever in a profitable and healthy banking system and I think that the media driven harping about variable interest rates and the linkage to the RBA are totally inappropriate. The public disconnect tends to be driven by the banks saying that they are finding it to be increasingly expensive to source funds from overseas so they put up interest rates on ‘existing’ loans as well as new ones. Perhaps we need a greater focus on fixed rate loans for the term of the loan rather than just for a couple of years.
There is also genuine disquiet within the community about information security when so many of these jobs are transferred to offshore service providers.
Wantok, the CBA boss claimed that the bank was actually losing money on new home loans. If so a 0.1% increase won’t yield fat profits.
That last point about information security is a real concern.
Also I did hear a story, not sure it’s accurate, about employees having to train Indians who were going to take their jobs, which made my stomach churn.
A bit OT sort of, but did anyone see Foreign Correspondent with Eric Campbell the other night?
No slight intended Brian, but I think Richard Flanagan could add “and the ASX” to his “we make too much of our politicians” . . .
The transcript–Foreign Correspondent ~ A Bavarian Fairytale
It was very clever, very funny and very wry.
Thanks for the heads-up on that episode of Foreign Correspondent, Link. Watched it on iView: very interesting programme.
This is a silly assertion. Australia’s banking sector has for a long time been much more lightly regulated than the US system. For instance we don’t have regulations specifying that loans are no recourse or regulations that specify a reserve requirement. And even government guarantees are very recent in Australia whilst being long standing in the US. And historically the US banned branch banking in various ways which has never been the case in Australia.
Let’s catalogue what happened in the GFC.
Banks made bad loans in part because of the moral hazard of past bank bailouts by GOVERNMENT.
Borrowers accepted bad loans in part because of no recourse loan rules dictated by GOVERNMENT.
Public debt became unsustainable in some nations due to excessive borrowing by GOVERNMENT.
Trying to pin any of this on libertarian schemes would be silly. And we don’t need libertarian political parties in order to pursue libertarian policies in specific sectors. Libertarian parties just offer an across the board package of policies that are libertarian. In Australia privatisation of banks was a libertarian reform implemented by a Labor government.
What a quaint, purblind world you inhabit, TerjeP. There is nothing in the banking regulation of most of the developed world that approaches the power and oversight of APRA. Your assertions to the contrary are sheer ignorance. If APRA had administered the US banking industry, those toxic institutions that drove the financial world into the ground would have been denied operating licences or would have been delicensed long before they became dangerous.
And what on earth do the fiscal difficulties of several nations have to do with the degree of regulation of the banking industries of those nations?
To a libertarian hammer, every problem looks like a government nail.
The US has a number of organisations that cover the same territory. As do most countries. See list here:-
http://en.wikipedia.org/wiki/List_of_financial_regulatory_authorities_by_country#U-Z
However feel free to enumerate the powers of APRA that is in your view lacking in other countries.
US banking regulation is a chaotic patchwork. If everyone has a steering wheel, no one is actually steering.
Which US “regulatory” agency allowed the big five US banks to flout capital adequacy requirements? This act of folly was the single greatest marker of the GFC.
APRA has industry-wide oversight of capital adequacy provisions in Australia. Maintaining capital adequacy was the single most important reason why the Australian financial system remained sound. Maybe Australia’s banks would have behaved responsibly without regulatory oversight. If the did, they would have been unique. The temptation to break the envelope during booms is very strong. Witness Iceland and Ireland, among dozens of tragic examples of irresponsible bankers’ aggression.
I’m pleased to note that you have desisted, eventually, from irrelevant talk of government fiscal policy. It may be possible to have a reasoned discussion.
Wait, banks made bad loans because the government would cover their bets? Seems to me that banks made bad loans because they found a way to lay off their bets in other ways, ways not covered by regulations, at least in part because governments decided to loosen the restrictions that had been in place following the Great Depression.
Borrowers sought and signed onto these loans because the government let them? But when did the government ever stop people from seeking and obtaining credit beyond their means – oh, yes, that’s right, at least in the States, back in the Bush II years, when personal bankruptcy rules became so heavily restricted, at least at a Federal level, that declaring was tantamount to volunteering to be homeless.
Public debt, insofar as government borrowing is concerned, seems a separate issue, not tied to bad mortgages and the arcane debt instruments unregulated financial institutions, including banks, developed to take advantage and pick the pocket of anyone willing to sign on, not limited to the suckers not reading the fine print, but also the gamblers who make up their peer population.
It’s not unlike the problem of addictive drugs. We find out this therapeutic substance has a quality making it attractive to abuse, so we regulate it. Then somebody comes up with a way to circumvent the regulations, either by illegal means or by developing something new with similar characteristics. The only real difference here is how much more easy it is to be inventive with ways to part a sucker from his money than it is to come up with substance-abuse products that don’t kill the host outright.
You do also get capital gain returns at pretty good taxation rates too. I agree with your post in general though. “Record profits” or “billions of dollars in profits” don’t actually mean much without a wider context to put them in such as size of business. So it was good to see Swan talking recently about return on equity – which according to him is pretty good for Australian banks.
I’ve had to do something pretty similar in the past though I didn’t lose my job it was a bit of a wake up call for me. In an environment of a high australian dollar, continuous productivity improvements should be the concern of employees as well as employers.
You have to stay ahead of the curve investing your own time to improve your skills or learn new ones to improve your own productivity or specialise in areas where there are skill shortages worldwide. Otherwise for many jobs its inevitable that there will pressure to outsource. Even if it doesn’t happen in the company you work for, their competitiveness will be challenged by companies who do. Living standards in India/China are rising and eventually there will be some equilibrium found – but it will be a while before that happens.
Just a final observation from me on this subject. I am no economist and I accept what the banks say about the increased costs of sourcing funds from overseas and I’m sure that the fact that most OECD country’s interest ratess have in fact reduced is explainable, but it makes no sense to me:
http://stats.oecd.org/index.aspx?queryid=86
Yes Wantok, it does seem odd but it looks like backs have been convinced by governments and central banks that sovereign nations are to big to fail.
So lenders indulge in the carry trade — government underwritten funds at low interest to be lent to sovereigns at a slightly higher interest at no perceived risk. This is what governments want lenders to do with these funds.
The alternative is to lend to a commercial bank at a higher rate of interest and face a risk of default. Now, a bank like the Commonwealth has two layers of major risk. The first is the parlous state of the overpriced real estate market. The second is the high level of the $A, which means that some time in the future the $A may depreciate in value, further eroding the purchasing power of the investors’ euros or $US.
Better to take the easy returns. Therefore the Commonwealth Bank is forced to accept higher funding costs.
I agree there is nothing wrong with profitable banks, and it is much preferable to the US/European alternative. My main objections are firstly to the exceptionally high exec salaries in the finance industry, and secondly to their monopoly powers.
Brian @4
I was recently made redundent and seeing the writing on the wall from a couple of years out I did my very best for my employer by training up staff, automating and re-engineering my tasks and documenting as much as possible to that aim.
There’s nothing wrong with training your replacements and anyone loyal to their employer would do the same.
What I object to is the report on tonight’s news about junior staff at the ANZ receiving luxurious cruises at the expense of loan borrowers. This is appalling waste by the ANZ and makes their 0.06% interest rate rise recently particularly unconscionable. Some of them aren’t even permanent employees I understand. What is it with these big banks that they think they can give the one-finger salute to customers, and reward insiders?
I say nationalise them all.
Seriously? Works out to be about a $8000 per person as a reward for junior staff and given the amount of money involved in their business is very small change.
Chris, I tend to agree with you, but it just looks bad.
You object to it being reported? Why? As long as it’s true, I’ve no problem with the report.
Ah, so it’s the benefit to which you object? Frankly, as benefits go, I’m pretty relaxed about it. Junior staff are not well paid. They are the first to go in any “restructure” or “rationalisation”. I also don’t see the interest rate rise and this benefit as in any way connected. Interest rate movements are driven by the strategy of the bank, taking into account funding costs, the risk associated with assets held as collateral against loans and the need to “act in the interest of shareholders”. Banks have no mandate at all to go beyond whatever undertakings to customers they’ve made or those that are the result of legislative requirement.
It should be recalled that borrowers are also investors. They are hoping to make money at the expense of other investors or renters, directly or indirectly. I see no reason at all for preferring their wellbeing over those of bank shareholders, those lending the bank money, lessees of property, the ATO, or for that matter employees or other creditors.
Personally, I’d prefer much stricter regulation of bank lending where real property is collateral. I’d also prefer a regime in which it was harder in practice to pay huge salaries to bank execs. These are separate matters of course.
At least you’re good at pedantry if nothing else.
This is OUR money the bank is splashing out with abandon. Nationalise it.
I have no problem with banks running healthy profits but I do feel like something is amiss when they are making record profits while large parts of the rest of the economy are doing quite poorly. And even more so when my industry (building / design / construction) is really struggling due to an inability to finance projects.
Unless you’re talking as a shareholder, its not your money. Besides, you really think that some public servants don’t have bonus schemes too?
Brian @ 20 – i agree its not a good look, but I’m disappointed that the bank has cancelled the program for future years. Meanwhile execs will continue to have their bonus schemes. Hopefully the company will find an alternative way to provide bonuses for junior staff that won’t get as much press coverage.
The desire for precision in communication often goes under the heading of ‘pedantry’. It’s no surprise though that the outcry against pedantry is heard most often from those who are intellectually indolent, and defensive about it. Really, you ought to have thanked me for calling you on your sloppiness.
It’s not ‘our’ money in any meaningful sense. To begin with, your first person plural pronoun is unspecified, and in any event, the dealing is not really in money but in securities of which cash/money is a subset. These securities ultimately represent the value of the surplus labour of the world’s producers. You don’t make it clear that it was this group referred to with your pronoun. This side of doing so, your remark, in context (animus towards low level bank employees, sympathy for property holders) sounds like simple minded populism to me.
I do agree though that banking services ought to be conducted by representatives of the world’s working people rather than agents of the world’s commodity property holders — assuming for the sake of argument that this is what you were proposing.
The private banking sector in Australia is in an extremely privileged position (e.g. the government guarantee, amongst other things) and profits from this handsomely. It does nothing for our competitiveness as a nation since it does not innovate and create real value for the economy, plus it drains talent from other more important sectors (e.g. science, technology, high-end manufacturing) because it can afford to pay higher salaries. Each bank also duplicates many activities such as marketing, which drains human and natural resources.
The government should step in and offer basic financial services to the public and SMEs. Employment in the banking sector would shrink significantly, which will allow these talented people to undertake more productive work (see below). Private banks can compete for the corporate and investor dollar with the more complex financial products.
The new government bank could either:
(1) Keep interest rates low, which would allow much more capital to flow through the economy, generating a stimulus.
(2) Raise interest rates, and pump the extra capital into health, education, transportation, communications etc
(3) Raise interest rates, and pump the extra capital into R&D and a public venture capital fund in order to help reconfigure the economy such that it will be more competitive for the 21st century (e.g. high-end manufacturing, contract research).
I reckon the Cruise Line company would like payment in cash or cash equivalent (ie credits of cash to their bank accounts). Your comment is capitalistic gobbley-gook.
One of the big banks agreed last week that their return on equity was 19%!!!!! This is outright theft from the people. Using capitalistic terminology, the return on equity may be allowed to exceed the long-term bond rate (say up to 2% max.) for “risk”. (Risk in Gorarnment guaranteed banking?!) The excess is theft on a grand scale. Banks don’t add value to the economy – they extract value!
I’ve obviously messed up my quotes. The italic section is mine. Johnny come lately, my comment was direct at Fran Barlow, not you, by the way.
[blockquote tags fixed by mods in previous comment]
“Banks don’t add value to the economy – they extract value!”
Banks add plenty of value.
They can hold deposits of your money, and accepting certain caveats there is a guaranteed arrangement for you to access these funds. In the meanwhile, they are somewhat safer than they would be in a Milo tin under your bed. You know this already, or you wouldn’t have a bank account.
They also provide liquidity to the economy by making loans, which facilitate purchases beyond what ready money a prospective buyer holds.
These things are of value, and value demands a price. Were the “Goranment” the sole takers of financial risk with respect to holding deposits and issuing loans, they too would demand a price for it. You must be terribly naive to think it would be as low as 2% over the long-term bond rate, and that it would be any better spent than other revenue.
You seem to be implying that the Government isn’t spending its money well. That’s nonsense. They and they alone saved us from a deep recession in 2008/9 by their timely expenditure. I’m appalled at the lack of credit that’s given them for that, and the constant nagging about waste on the various programmes. Look at the big picture.
Thanks Brian. I can tell a similar tale as an investor in a 2nd tier bank where I also have a governance role in a related party company. If I’ve made any real financial gain out of my investment, I’d be surprised. Indeed if I look at the capital gains, they are mostly capital losses that I choose not to realise (by selling the shares).
And it is true that the cost of funds has gone up and that the number of mortgages is declining. That’s two big impacts on a banking business.
All that said, I also have a friend who will be retrenched by one of the big 4 in the next few weeks and it’s tough going for him and understandably he’s worried about his future after a long and successful career in that particular bank. What will happen to him? Where will he go? I’ve been through that and I know what it’s like.
On the other hand, I’m sure the banks aren’t happy with losing their talent pool either.
But Hammygar, I hope that all businesses reward their staff for doing a good job. We might argue about whether the trips is a good thing, but if they were investing $8K in a different rewards program wouldn’t we think that was positive?
They can start by awarding them ALL decent pay packages, and not to giving luxurious cruises to just the bosses’ favourite lackeys.
PM @ 23, if the bank lifts profits nominally at all it will be a record. In the case of CBA this time it was in line with inflation, so essentially flat, but a record nevertheless.
Not lending to small business is indeed a problem. Overseas I understand it’s worse. The reluctance of o’seas banks to lend to anyone is one of the reasons funding to our banks costs more, as I understand it.