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Are bank bosses mad?

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by Peter Switzer

The great US comedian Bob Hope once described a bank as a place where they lend you an umbrella when the sun is shining but want it back as soon as it starts to rain. The actions of ANZ and then Westpac show where Hope got his material from — there has been a history of banks gambling with long-term relationships with customers.

Greece concerns

This monetary madness comes as the Greeks again are unsettling financial markets. The Dow Jones index gave up 89.23 points, or 0.69 per cent, to close at 12,801.23, while the S&P 500 dropped 9.31 points, or 0.69 per cent, to be left at 1342.64.

Share players are getting a little worried about the Greeks again — the VIX or fear index is on the rise now being over 20, and I contend that if the Europeans had played ball properly with the debt management plan, then interest rates for foreign-borrowed money for our banks would not be so high and on the rise. So what happens in Europe over this month and March, with a number of key meetings and negotiations, will have a big bearing on global interest rates, what our banks charge us in coming months and the long-term popularity of the banks.

Banks earnings this week

Brian Johnson from CLSA Asia-Pacific is regarded as one of the country’s leading bank analysts and he expects CBA and NAB to raise rates, arguing that the loans they now sell through mortgage brokers are hardly covering costs. He would know and so it shows that the banks are in a classic short-term versus long-term relationship dilemma.

The drama will continue this week with CBA reporting profits on Wednesday, Westpac on Thursday and ANZ on Friday. And the stoush between banks and bank bashers such as the Treasurer Wayne Swan will hot up if the words “record profits” get mentioned in media despatches!

Lifetime value

One of the best business thinkers I have come across is man called Jay Abraham, whose number one rule amongst a pile of sales and marketing maxims is always think about the lifetime value of the relationship with your customer.

He argues that with a new client you need to ask what is possible when you look at the long-term rather than the short-term? So you could make a lot of money out of the first sale and get dribs and drabs along the way or even no more sales. On the other hand, you can make a smaller amount on sale number one but then keep that customer for ten years making a motza!

At this stage, the CEOs of ANZ and Westpac are more preoccupied with their short-term situations where the cost of funding is definitely rising, which means if they succumb to no interest rate changes, profits will fall. However, the fall would be from record levels and that creates the negative marketing opportunity out of all of this. The actions of NAB and CBA will be very interesting.

NAB has shown it has broken from typical banking behaviour but it’s experiencing some cost challenges as last week’s company reporting revealed. Meanwhile, the CBA has a new boss in Ian Narev, who has to juggle rising lending costs with bottom line challenges and his new relationship with his customers.

As they stand, the home loan rate from the various banks are: ANZ 7.36 per cent; Westpac 7.46 per cent; CBA 7.31 per cent and NAB 7.22 per cent. Of course, these are advertised rates and the better your relationship with the bank, the lower your actual rate might be.

Important week

I think this will be an important week for the relationship of the banks with their customer base, with the Gillard Government champing at the bit to get stuck into the banks to build up their improving ratings in the polls. Meanwhile, it will be a big test for Tony Abbott and Joe Hockey who want to bash the Government but don’t know which way to move when it comes to the banks.

Luckily for the banks, we haven’t got a history of being vindictive and ready to move our accounts when their actions have hit our hip pocket. The irony is that one reason why new loans are costing banks more, over and above the rising cost of loan monies from overseas is that mortgage exit fees are banned on new loans.

Personally, I think it’s madness for bank bosses to raise rates now but only time will tell if there was a clever method in their madness.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Monday, February 13, 2012

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