It’s amazing what you get used to. What was once abhorrent to us becomes normal. As a young idealist you may have once said that I will never work in a dead-end job. However the realities of life force most of us to compromise those hard and fast ideals and settle for regular pay. In politics we vote for governments of both colours to lock up men, women and children whose only crime was to flee death and seek out a better life for their children.
If we told our younger selves that’s what we would be doing as adults, we may not have been too pleased with ourselves (apologies to people who always thought this was a good idea).
Often we justify these decisions by clinging to statements that we hear from people of authority. At work it may be that your boss has told you – a few weeks before year-end – that achieving your KPI this year will ensure you are employed next year whereas a few short years ago it could’ve meant a substantial bonus.
What your boss is doing is managing your expectations. Conditioning you. You may still get a bonus but it will be a fraction of what you should’ve received but as you’re now expecting zero, you may find yourself being grateful to merely being employed.
So it is with lenders.
Each year the leadership of the major banks conduct a presentation to the press and equity analysts. Each year the banks present record profits and the equity analysts ask about margin compression (something that won’t be a problem this year – more on why below) and the cost to income ratios. Each CEO then proclaims that they will further reduce the cost to income ratios and the herd is placated.
So what’s the problem? I’m glad you asked.
The media was rightly aghast recently when a certain deputy-mayor re-cut a property development so that buyers were left with significantly less floor space but the same cost. The said deputy-mayor made an extra $45M (according to this article in the smh.com.au
However, not a word in anger has been written about lenders’ strategy of taming the investment housing market as directed by APRA. The first lever they reached for was price. And, as if to rub it in investor’s faces made the price decision retrospective.
Sure their was some pretense about playing with LVRs but it’s the retrospective pricing that has really caught my attention.
While I can get my head around increasing the price on new investors to curb demand but how will increasing the price on existing investors tame the property market? This is surely a gouge.
As if to underline this point, some banks must’ve seen this market come to a screeching halt and very quickly reversed part of the price increases.
Given that our banks are really a one trick pony these days – property, property, property – it comes as no surprise this move to swell margins will be met with quiet approval from the equity analysts.
They have now moved on to the second chestnut of cost to income ratio. We’ve already heard one bank announce that this ratio – which is at ridiculously low levels already will be further reduced as branches are closed and new tech is introduced.
What they will not announce is that the largest expense, people, will also be reduced and any strategy aimed at revenue diversification (but that’s another article).
Don’t take my word for it have a look at the graphs published by the RBA (here and here) below.
Rather sobering don’t you think? The second graph is a little unfair to our banks as it compares their global operations to their local operations – and given our banks’ global operations are almost non-existent, further confusion is provided by the global banks having so many other high value revenue sources (investment banking, trading and others- these areas are far better remunerated by commercial bankers). I merely include it so that you see how you compare to your global banks peers.
So, if you’ve achieved your KPI this year your boss may already be preparing you for a disappointment. Because he/she can. The ultimate boss (the CEO) has just laid the groundwork for it.
Good luck.