Earlier this
year, ANZ group chairman David Gonski pleaded with the public to “stop
bashing the banks” for being too big and too profitable.
Spurred by the media, bank bashing is one of the most popular national
pastimes in Australia alongside cricket or the beach. This is despite
the Big Four banks’ priority to reinforce stability and transparency.
Complete self-sufficiency and the ability to absorb a ‘black swan’
economic event is the goal, effectively relieving the government of
‘lender of last resort’ status and a repeat of tax payer funded
bailouts witnessed in other countries during the Global Financial
Crisis (GFC).
Adding to the public’s exasperation, banks have recently hiked
variable mortgage interest rates citing the need to satisfy higher
capital adequacy requirements. The contention revolves around the
premise that bank profits are deemed exorbitant and yet they are still
increasing fees.
The million dollar question remains – what is the basis for the
public’s emphasis on, and criticism of, bank profits? Has the
community at large shifted its perception of banks from a
profit-making business to a utility or public service, thus expecting
it to operate within those boundaries?
Consequently, the public relations battle will only become more
tedious with each reporting cycle. With persistent negativity, both
retail and business customers will devote additional thought to
switching to alternative providers – most of whom are happy to provide
the same products, with dedicated service and at a competitive price
point.
Further, why do the likes of Apple return large profits but are left
unscathed? How do Australia’s largest banks stack up against global
brands that are able to avoid the ‘excessive profitability’ limelight?
First of all, comparing headline profit figures in dollar terms is
misleading.
Return on Invested Capital (ROIC) is an ideal approach to ‘levelling
the playing field’ given it represents how well a company is putting
its capital to work. This is the profit returned for every dollar that
is invested in the organisation, expressed as a percentage. ROIC also
rules out foreign exchange fluctuations for companies reporting in US
dollar terms.
Viewed on this basis, Australian banks don’t perform as strongly as
companies in other industries. Rarely do we see articles in the media
castigating Apple, in fact quite the opposite. Analysts are often
praising the innovative wherewithal of the Silicon Valley based
technology company, and devout customers line up and down the street
whenever a new product is launched, despite the price tag.
Apple’s ROIC is a healthy 34.0 percent - almost seven times that of
the Big Four banks - but no outrage to be seen here in the wake of the
company’s own scandals or PR issues, just an enormous number of
iPhones purchased year after year. |
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Sportswear maker
Nike, whilst not achieving as stellar a performance as Apple with a
ROIC of 25.4 percent, also outperforms Australian banks substantially
in this metric
Nike has withstood its own share of bad press in the past, yet
customers are still clambering to get the latest Air Jordan’s to drive
annual sales growth consistently above 8 percent and revenue higher
year-on-year. Nike CEO Mark Parker has committed to exceeding revenue
of US$50 billion within the next five years – an ambitious target well
above current revenue of US$20 billion.
Closer to home, Harvey Norman exceeds all of the Big Four banks by a
considerable margin yet no one is astonished that they are providing
stronger profit advice against a raft of offshore and online
competitors.
In fact, you hear more about Gerry Harvey being the victim of internet
sales in the media than about how much money is being made by the
group’s retail brands.
Even with all-time low interest rates, you can almost get as good a
return on your investment as NAB achieved this year at a ROIC of 2.93
percent.
Shareholders are increasingly making their voice heard and expressing
their view on how the banks are being run, demanding better returns
despite the ‘lower for longer’ mentality brought on by regulators push
for safer, stronger banks.
Let’s not forget either, most Australians’ Super holds a high
proportion of bank shares. In the transition to more stringently
regulated, safer banks it certainly appears the days of the ‘special
dividend’ are long gone.
In a way the banks are not dissimilar to the Australian government’s
current balancing act, pitting the need to stimulate greater economic
growth, demand and infrastructure development against ‘budget repair’.
It is by no means an easy feat for the banks to continue upgrading
their digital offering while socking vast sums of capital away to
satisfy upcoming Basel IV requirements.
As analysts and investors closely examine EPS and dividend yield
forecasts of the banking sector in the short and medium term in light
of major headwinds, the banks are forced to adapt to maintain
profitability and keep pace with the ever expanding array of new
competitors.
Bank bashing may have effectively become ingrained in the Australian
subconscious however the shift to strength and stability and popular
view that A$30 billion in cumulative Big Four profits may be a peak
could be the first sign of a shift in thinking.
The bank’s need only look at the corporations in other industries
driving profits higher and winning the PR battle for inspiration.
As evidenced by the share economy and industries undergoing
disruption, developing positive customer advocacy is the first battle
to be won in a long and difficult war. |
