Even Down Under, Banks Looking a Tad Exortionate

Australia has less income disparity than the US (not that that is saying much, the US is the most extreme among advanced economies) by virtue of having relatively high minimum wages and cultural opposition to big pay packages. Australians are pretty egalitarian; for instance, they are skeptical that large paychecks are fairly earned (ie. they are immune to the US “talent” myth). Their “tall poppy” syndrome means they like cutting people who stand above the herd down (superstar footie players being a notable exception).

And the argument that lower Australian pay levels make it hard for Australian companies to recruit executives from overseas may be true, but appears to have not done the damage big search firms would like to claim, since the Australian economy has shown a much better growth record than other most other advanced economies. But Australian banks are reaping record profits, hence bank executives are pulling down sums deemed outrageous by Australian standards. As reader Skippy notes, the natives are getting restless. From the Herald Sun:

Not content with multi-billion-dollar profits, the big banks are coming after borrowers in response to what they argue is the “real cost” of the money they lend.

The banks have launched into a war of words with the Reserve Bank and Treasurer Wayne Swan as they pave the way to jack up interest rates as early as Tuesday.

Their powerful lobby group has issued a stern reminder that the banks – and not the RBA – set mortgage rates, and that the RBA’s official interest rate is “only one consideration”.

The warning comes ahead of a raft of profit announcements, with the “big four” expected to report a total profit for the year of $21 billion – almost $1000 for every man, woman and child.

Executive pay packets have exploded amid the mushrooming profits, with Commonwealth Bank chief executive Ralph Norris on a $16 million package this year, up 75 per cent from last year.

Economists say there is an even-money chance the RBA board will lift the official cash rate 0.25 percentage points to 4.75 per cent when it meets next week.

A string of economists and analysts told the Herald Sun if the RBA did lift the cash rate, the banks were likely to grasp the opportunity to hike mortgage rates higher still – by up to 0.45 percentage points.

That would add $88 a month – or more than $1000 every year – to the typical $300,000 mortgage, pushing many household budgets to the brink. [Yves here. Australian mortgages are floating rate, so rate increases translate directly to higher mortgage payments]

Mr Swan said this week there was “absolutely no justification” for any bank to raise interest rates beyond RBA movements.

But the Australian Bankers Association has returned fire, saying “the real cost of money” is different to the RBA’s official cash rate, and 30c in every dollar lent by the big banks is raised overseas.

Chief executive Steven M adinchenberg said: “The cost of that money has remained high and volatile, and is not controlled by the Reserve Bank. (The banks) have a responsibility to remain solid and healthy so that they can continue to raise money offshore from overseas investors to support the growing Australian economy.”

Christopher Zinn, spokesman for consumer group Choice, said the banks’ healthy profits more than compensated for the increased cost of overseas funding…

“It is really riling for customers, but every time it happens, the consumer anger grows, and that may one day lead to the Government moving against the incredible power of the banks,” Mr Zinn said.

Yves here. A reader comment on the article gives some insight into local sentiments:

Oh….of COURSE the Banks have to raise their interest rates. Norris gives himself a 16 MILLION DOLLAR package? Up 75 percent from last year? And we wonder why interest rates keep going up? There’s your answer, right there. So those criminals who run the show can get nice and fat on our money. The same as that woman exec who gave herself an 11 MILLION DOLLAR bonus. And they’ll keep on getting away with it, until someone has the balls to stand up to them. And this current Govt wants to go after the Mining Industry? Gimme a break. Tax those bank high-flyers 97 cents in the dollar for their extortianate salaries and bonuses. Then tax the Banks for their obscene profits. Problem solved. And don’t try to give me any of that bunk about the ‘real cost of money’. They never send anything our way when overseas does well. So why the hell should be tip in if overseas goes bad? Leeches and criminals are running this Country.

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7 comments

  1. Crocodile Chuck

    Australian banks over the last decade: the economy grew at 3-4% pa, bank balance sheets grew by 15% and bank CEO’s remuneration by 20-30%!

    Two elements of drag for them going forward: 1) its the end of the line for domestic m&a activity-the regulator just knocked back a takeover of the australian arm of AXA Asia Pacific by nab’s wealth arm (national australia bank); this after Westpac’s takeover of St George and Commonwealth’s takeover of HBOS owned BankWest.

    2) the runup in resi real estate has hit the ceiling-monthly mortgage payments now account for up to 45% of some household budgets – no more blood from the turnip-people simply can’t pay any more

    so expect to see them perform in the future more like utilities. the last time I looked, energy retailer CEO’s made a fraction of what their bank brethren did…….and utility stock earnings are much less volatile..

    1. Skippy

      Lets not forget CBA’s shenanigans via STORM financial….

      http://www.businessday.com.au/national/stormdamage

      Storm made secret CBA deal

      Stuart Washington A secret deal between the Commonwealth Bank and Storm Financial has been revealed as a factor behind $3 billion in investor losses.

      Still many of the big banks down here backstop all the dirty players like this guy…

      http://www.financialstandard.com.au/news/view/28747/

      Mark Bouris…cough…s%&m b@g..

      How many houses have been sold using the same garbage formulas as was done in the states ie low doc, low down, no proof of savings etc etc and as you point out the 45% of income to service these loans is at its limit.

      Skippy…they will be as blind as those in the states were when it hits, states and government are running out of bullets, they (mining) ambushed Rudd, states have sold the majority of their assets, infrastructure stimulus slowing down (CLEM tunnels in QLD et al), discretionary spending down across all income brackets, although our top earners have been dropping some dough on hard assets it seems.

      PS…we probaly know some of the same people, if not each other, tis a small world down here…eh…lol.

  2. anne

    Not everyone wants to live in Sydney, Melbourne or Brisbane or for that matter any capital city. You don’t have to have a huge mortgage to live in the smaller towns. In fact you can find houses here for around 150k. Two hours away from a capital city.

    They have jobs, industry and tourism. Join the golf club – $300 per year – 400 if you want to do the competitions – 18 holes of irrigated beauty.

    The gray haired nomads are everywhere. Cashed up – and travelling around the country in their expensive cars and caravans. Didn’t see too many of them in the US.

    Yes the banks here are a/holes… I always used to joke at my bank in the US … you need to become like Aussie banks – close all branches, encourage direct pay deposit, limit withdrawals and charge like crazy for anything extra. Oh and give crap customer service. No bloody coffee or cookies in the branches here. Just a surly teller.

    Housing prices in the cities are expensive – but you don’t have to live in a city. Country schools are good here – they are state funded – not that funky county funded as they are in the US. You can live cheap in Australia – because the wages are so much higher than the US (for low income), national health (no medical bankruptcies here) and a great climate to boot.

    All you naysayers out there – when you can live in a nice climate, don’t have to have 3 jobs to survive, kids can participate in sports (don’t have to have health insurance here) and there are no 80 year old check-out chics. Well .. nothing really to complain about is there? Pull your money out of the big 4 and invest in a community bank. Easy.

  3. Gordon

    So, we have a situation where “30c in every dollar lent by the big banks is raised overseas” in a world with a growing aversion to debt, and lent on in a country where by most people’s reckoning there is a pretty huge housing bubble (eg. bank balnce sheets growing many times faster than the economy per comment by Crocodile Chuck).

    Put this together with the self-serving self-delusion of the banks – see for instance Steve Keen’s demolition of Commonwealth Bank http://www.debtdeflation.com/blogs/2010/09/15/more-on-the-commonwealth-bank/

    Together this makes the perfect receipe for a disaster – check Britain’s Northern Rock for details of what happens next.

    It’s time bank directors were stripped of limited liability protection and their entire personal assets made forfeit before a single cent of public funds were used to bail out their bank. That would concentrate their minds most wonderfully.

  4. David

    Its pity Ozzies are not learning from mistakes
    in Europe and USA and still believe in “lucky country”
    concept. They are not lucky just slightly isolated so
    economic dynamics are different and easier to control.
    In essence problems are the same of overpriced realestate
    By probably 40% and banks reckless landing supported by
    daily politics. It’s dangerous territory and consequences will be severe.

  5. Monko

    Unfortunately executive bonuses, particularly in banks/financial services, are driven by exceeding targets & performance hurdles that always increase over time. So if productivity gains are not achieved, then only real options are riskier products, riskier clients or risky cost cutting. Australian banks will implode like their American, European & Japanese counterparts, it’s just a matter of when.

    Its is a bit like a team at one of Japan’s nuclear plants about 10 years back. Driven by the ideal of continuous improvement, they kept gradually increasing the amount of uranium hexafloride they were processing at one time. Until however, the amount was sufficiently large enough for the uranium to go critical & everyone in close proximity was fatally irradiated. Banking seems to have similar characteristics….

  6. John

    Excessive managerial and exorbitant executive pay packets are actually one of the causes of the GFC
    Im not saying the only cause (just one of them)

    The reason for this is;
    High $$ amounts are being sucked out of the economy by these executives etc. There is then no longer as large a sum available for circulation and use by the average person.
    The resulting bulk of the $$ is being stashed away in various tax havens or trusts etc

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