From media reports and the written speech, the strident defence today by Westpac of its offensive 0.45% home loan rate rise two weeks ago resembled the Black Knight of Monty Python fame.
He’s the chap who continued trying to fight as each limb was hacked away, a lot like the defence Westpac mounted at the time of the announcement (basically no one around to comment after a statement was issued), and then the ham-fisted way it was further defended by CEO Gail Kelly and her gang of senior reporters (AKA The Kelly Gang).
This morning, the bank’s chairman and head banana, Ted Evans, a former head of federal Treasury, mounted the podium at the AM in Melbourne and gave us more of the same.
“We absorbed some of the external cost increases, rather than pass them on to borrowers at the expense, of course, of shareholders,” Evans said at the bank’s annual general meeting today.
“With interest rates now clearly on the rise again, both at home and abroad, there are limits to how long we could continue to absorb these costs without weakening our bank, the Australian financial system and, hence, the Australian economy.
“We would do no favors to anyone by offering mortgages at rates that we know to be unsustainable.”
When bankers grab hold to the national good to help justify a bad decision, you know (like politicians grabbing onto patriotism) that you are being screwed.
Evans told the meeting it would not be fair for home loan borrowers to pay lower rates while business borrowers faced higher interest charges.
“Nor is it fair to other borrowers, such as small business owners, or even large project developers, to have their interest rates increased so that mortgage rates can be subsidised,” he said.
“Nor is it fair to those who save to have deposit rates held down so that mortgage borrowers can be subsidised.”
Well, so what? Westpac has been charging business higher interest charges for year because its failure and arrears rates are always higher than for home loans. It’s a simple cost of funds, which has to cover provisions for bad and doubtful debts and for write-offs of failed debt.
Home loan arrears and write-offs have been much lower than for business, but apparently not in the banana smoothie world that is the upper echelons of Westpac these days.
Home loans have a much lower capital weighting than loans to business, so they are therefore cheaper to make and hold (and cheaper to sell to the Reserve Bank, as Westpac and other banks did a year ago to raise cash after being cut off from overseas for a month).
Evans admitted that poor business lending and company failures had led to the rise in bad debts in the year to September 30.
“As is clear from the chart, revenue growth was strong, up 13%, reflecting good markets income and increased share in key lending and deposit products.
“Expense growth was held to 5%. This, combined with the strong revenue growth, resulted in further improvements in efficiency: our expense to income ratio fell to just 40.2%, a record low both for us and for the Australian banking sector.
“Offsetting that excellent performance was a material rise in impairment charges, or bad debts, which increased by over $2 billion.
“I would like to discuss this a little further because I know it is an area of concern to many shareholders.
“Around one fifth of the increase in impairment charges was directly linked to the global financial crisis in that it emerged from a small number of large companies whose business models did not stand up under the pressures of the circumstances.
“But those cases were limited in number.
“The majority of our losses over the year can be traced back to the deterioration in economic conditions in both Australia and New Zealand — two segments of note were mid-sized commercial customers, and property development.
“Importantly, the consumer sector has continued to perform very well.”
So relatively speaking, consumers have proven to be the better risk, and have helped the bank survive the GFC and some dud business lending. Home lending is growing, business lending isn’t.
So what Westpac has done is classic banking 101: impose higher cost recovery targets (aka wider spreads via higher rates) on the part of the bank growing the fastest, to generate higher overall revenue and make up for the sluggish business lending.
This has coincided with Westpac and the other Big Three banks getting into a slugfest for customer deposits, offering 6%-8% for term deposits of varying maturities.
The bank has been forced into the slugfest because it has been told to get more stable customer deposits onto the balance sheets because they are more reliable than the easy way Westpac and other banks took to funding their businesses, by borrowing in local and international wholesale markets, for as little as 3-6 months.
If Westpac and other banks had been catering to customers in the days of easy credit by offering reasonable returns on deposits (instead of 1% to 3% when lending it out at 7%-9% or more), then they might not be in this predicament.
There was no mention by Evans about how Westpac boosted its profit margins during the year by 0.31%. That this happened in the toughest year since the last recession for the banks says a lot about the immense strength and profitability of the bank.
It doesn’t need to raid the customer bank balances to fatten its profit margins, or pay the bonuses of the likes of Kelly and her all male reporting executive team.
Who on earth is providing the PR advice/management to Westpac? Is there anyone? Or are they just being ignored? From a purely PR perspective it’s bad enough to dump an unpopular decision on your customers but it is business suicide to keep doing things to remind them of it.
Even if the rate rise was justified (and I’m not saying it was) no-one is ever going to believe Westpac saying it is in their best interest. Westpac should just SHUT UP and hope the story gets bumped off the front page by another company’s piece of folly.
The media generally have the attention span of a goldfish but the way Westpac is behaving is positively encouraging a media outlet with few summer stories to begin a major campaign against them.
Public good? I’ve been an outraged mortgage holder with Westpac for well over a decade and I’ve found the perfect way to hit back at them. This last outrageous effort from them has finally spurred me into action: I’ve sold my house and discharged my mortgage in protest against their excessive rate increases and inappropriate victimisation of bananas. Brothers and sisters lets all unite, sell our houses and show them who the real monkeys are. We can all get back in on the ground floor when that real estate bubble bursts from flooding the market with houses for sale.
BTW, anyone got a spare room they can let out cheap? I didn’t see those mortgage discharge fees coming – they are a real lifestyle killer!
Oh dear, poor Westpac. Costs escalating and margins slimming – perhaps it’s time to get out of the business before it really becomes unprofitable.
Seriously, why do we continue lambasting private companies in a cozy, government-supported oligopoly for seeking to make inordinent profits? It’s what they’re meant to do! If they didn’t seek to maximise profits, their senior managers would soon be out of a job. Trying to make private banks be socially responsible (where there isn’t a profit) is like trying to make developers create great built environments. Corporations are constantly seeking to create and maintain an unfair advantage so they can screw profitably – and good luck to them, I say.
When you see bad design (“Meritown” or Sydney as it used to be called) you can never blame developers but the public processes that controlled (or in this case aided and abetted) the disaster it has inevitably become. Same with banks – protected by Government fiat, OF COURSE they will rape and pillage.
The answer, it seems to me, is more along the lines of the Health and Education systems (yes, I know, not ideal examples but bear with me). We (i.e. the government) should provide a base-level, universally-accessible presence in the banking marketplace (it used to be called the Commonwealth Bank but that somehow slipped out of our hands). Let’s call it OzBank, OiOiOi or similar. Now, every citizen and resident is entitled to a free account with OzBank (normal charges for transactions etc would apply) – and this account is the default way in which money changes hands (in both directions) between the Government and the People. OzBank would supply basic, retail services – but also management of the funding for government investment initiatives such as the National Broadband and the million and one other ways governments manage money – it could collect and disburse money for all government levels including local councils – perhaps even pay for parking with your ozBankCard!
If people then want to avail themselves of extra boutique, high risk, high-profit services from these wonderful private bankers – go to it – have fun. But the basic banking of government is managed by OzBank. It would have a major online presence – and could possibly use Post Office branches as the physical presence.
Anyone today knows it is impossible to survive without a bank account. With an OzBank account we remove the consequence of this absolute need for an account at a private bank resulting in $17 billion dollars annual profit for 4 companies – almost $770 per Australian per year!
Your thoughts?