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Tough love for the Big Four banks

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by Peter Switzer

This might sound like national treachery of Quisling proportions but I have to confess to loving the Big Four Australian banks!

Yes, I know that they have an inclination in varying degrees for being absolute bastards but, like family members who can occasionally let us down, they are still worthy of love — albeit tough love.

Greediest banks of the year award

Before I unleash a virtual tsunami of hate email reactions, let me be completely honest and say I do hate them, as any self-respecting person with a memory as well as a mortgage should, for what they have done with interest rate rises.

This of course includes the December extra rises, spearheaded by Gail Kelly’s Westpac with their 20 basis points add-on to the 25 basis points, or 0.25 per cent, increase pushed through by the Reserve Bank.

Now, remember my family analogy when I reveal that my reaction to that was to suggest that our Gail made her the front-runner to win the title of the greediest banker of the year for 2009. By the way, I can now reveal that this Switzer award did go to Ms Kelly.

Honest relationship

So even though we should love our bankers, like family members, we have to be honest with them to ensure a real and meaningful relationship results. We also have to recognise their strengths and their weaknesses.

And all of this somewhat weird loving analysis of our banks possessed my thinking after looking at Westpac’s trading update, which showed first quarter cash earnings were up 33 per cent or $400 million on the corresponding period last year.

Analysts say the bank could come in close to the CBA’s most recent half-year profit record result of $2.9 billion.

Help at hand

A lot of this great news has come from the fact that the Big Four banks have benefited from their strength and our better regulation. They also were helped by the GFC and the credit crunch that KO’d non-bank lenders and restrained smaller banks.

They were helped by smart Federal Government stimulus, which was rolled by us as taxpayers and the fast reaction of the Reserve Bank to over-cut interest rates.

This meant our economy dodged the recession bullet and therefore bad debt provisions made earlier by the banks now have been seen to be too big. This is helping profit results now.

And while it’s hard to enjoy the banks' big profits, the fact that unemployment is 5.3 per cent and not close to 10 per cent, as it is in the US and other places, is partly linked to the fact that our Big Four banks are in the top 20 safest banks in the world category.

Doubts dispelled

A very senior banker told me recently when they went overseas looking for money a year ago, overseas lenders did not believe their good story about the Oz economy and the bank’s balance sheet. However, this year the potential lenders have admitted their doubts of a year ago, which now they have dispelled.

It means we are getting money at cheaper rates than if our economy was a basket case and our banks were duds like many in the UK and the US. And even their great results, which reflect excessive tough love on their part on us as their valued customers, has to be seen in context — we are lucky to have banks with strong balance sheets.

More competition

I think the Rudd Government needs to do more to help smaller banks and non-bank lenders access money at lower prices to bring back competition. That’s the best way for banks to behave better.

There are a number of options on the table, but I reckon the Government is dragging the chain. However, I hope they come up with something in an election-year.

Rate rise

For those of us who don’t like the banks’ interest rate actions, they can always get even or hedge their bets against the bank by buying bank shares. So, they might screw us on the home loans, but you can get paid back in dividends and a rising share price.

The banks pay dividends, fully franked, around 4.5 to 4.7 per cent and NAB is now at 5.83 per cent!

I know many younger families can’t get even now because things are tight but they would be worse if the jobless rate was 10 per cent. And anyway, there at least is an investment strategy out there for you when the financial family stress eventually eases.

Love and scepticism

To sum up, I love the banks as an economist, as an investor, as a financial planner and as an optimistic market commentator, who tipped the 2008 market comeback, which the banks helped power along.

However, as someone with a mortgage, I maintain a healthy scepticism and at times — such as in December last year with those extra rises, which to be factual NAB did not pass on — I hate the bastards.

It’s just like family, isn’t it?

For advice you can trust, contact Switzer Financial Services.

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.

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Published on: Wednesday, February 17, 2010