Bulked-up banks forget the little guy

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This was published 14 years ago

Bulked-up banks forget the little guy

By Stephen Mayne

The latest market capitalisation league ladders that appeared in the weekend papers provide a stunning example of big bank power in Australia. Here's the top five:

BHP Billiton: $128 billion (excludes UK shares)
Westpac: $73.72 billion
Commonwealth Bank: $72.78 billion
National Australia Bank: $58.68 billion
ANZ: $52.99 billion

No other country in the world has four domestic banks in their top five most valuable companies and never before have our big four banks all been in the top five with market capitalisations each exceeding $50 billion.

Indeed, who would ever have thought that Australia would have four of the world's eight remaining AA-rated banks after the great credit crisis of 2008-09?

Given the staggering $18.5 billion in new capital raised by the Big Four over the past year, their combined market capitalisation of $258.17 billion is getting close to the $275 billion reached at the top of the boom, even though the All Ords is still 36 per cent below its record high of 6873 points on November 1, 2007.

One of the reasons for the huge market capitalisation figures is that big four investors are collectively sharing in $8.6 billion worth of paper gains on all this newly raised capital. However, the vast bulk of these gains have gone to institutional investors at the big end of town, rather than regular retail investors.

Here is a breakdown of the paper profits that institutional and retail investors in big four bank capital raisings have enjoyed over the past year:

raised $4.865 billion in total starting with a $2 billion institutional placement at $38 a share in August last year to fund the BankWest acquisition. Followed up in December 2008 with another $2 billion institutional placement at $26-a-share and then belatedly offered retail investors a $10,000 share purchase plan at $26 in February this year, although they missed out on the $1.13 fully franked interim dividend which went to the institutions. The SPP raised $865 million, so in total 162.8 million new shares were issued over the past year and at Friday's close of $47.02 they were worth $7.655 billion, suggesting a total paper profit of $2.79 billion. However, only $700 million or 25 per cent of this gain is attributable to retail investors.

raised $4.7 billion in total starting with a $2.5 billion institutional placement at $14.40-a-share in June 2009 and was then swamped with $2.2 billion worth of applications for its $15,000 share purchase plan at the same price. Had proposed capping the SPP at $350 million but ended up accepting $1.85 billion of additional funds from its retail investors. Total paper profits based on Friday's close of $20.74 are $2.07 billion and retail investors are enjoying 46.8 per cent of them or $969 million.

raised $6 billion in total starting with a $3 billion placement in November 2008 at $20 a share and then a further $250 million through a $10,000 share purchase plan in December 2008 which was priced at $19.97 a share. Backed up with another $2 billion institutional placement at $21.50 a share in July 2009, accompanied by an SPP capped at $750 million. Based on Friday's close of $27.75 and assuming the current SPP is not expanded beyond $750 million, the total paper profits are $2.06 billion, but only $315.4 million or 15.3 per cent will go to retail investors. NAB is under pressure to follow ANZ's lead and not scale back the latest SPP which closes on Friday and is currently 29 per cent in the money.

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$2.5 billion institutional placement in December 2008 at $16 a share followed by a share purchase plan in January 2009 that pulled in an additional $442 million so total of $2.94 billion raised. Paper profit of $1.543 billion based on Friday's close of $24.40, but only 15% or $232 million is attributable to retail investors.

Bank shareholders richest of them all

While ordinary Australians curse at having to suffer the world's most expensive banking system, even the lucky minority who invested in bank stocks after the last bad-debt crisis in the early 1990s have been getting ripped off by these financial giants.

If capital was raised fairly in Australia through renounceable rights issues, you wouldn't have the bizarre situation of retail investors directly owning about 40 per cent of our big banks but only pocketing $2.21 billion of the $8.6 billion in paper gains generated from big four capital raisings over the past year.

That said, Australians who own bank shares are clearly cashed up from the huge returns that have been generated over the past 15 years.

Witness the way more than 178,000 ANZ shareholders collectively stumped up a record $2.2 billion in its recent share purchase plan. The $669 million coughed up by Macquarie Group retail shareholders in June and the $865 million forked out in February's Commonwealth Bank SPP further demonstrated that Australian bank shareholders are a pretty wealthy lot.

Bank shareholders can afford to give customers more relief

My wife and I have each shelled out $15,000 for the NAB's $21.50 share purchase plan, which closes on Friday. If the share price holds and there is no scale back, that will deliver a quick paper gain of about $8700 and lift our capital raising profits for the year above $200,000, as is explained here.

With windfalls like that, the lucky owners of Australian bank shares could easily afford some more relief being given to bank customers on top of the recent cuts in those outrageous exception fees.

And don't for a moment think bank fees have been coming down during the global financial crisis. The Commonwealth Bank used to only charge $1.25 for a cash advance on the credit card. Sure, we were still paying close to 20 per cent in interest straight away, but if it was just to plough into a capital raising offer for a few days, it didn't really matter.

Lo and behold, in May this year CBA decided to bring their fees into line with the other big banks and started slugging customers 1.25 per cent of the cash advance as an up-front charge.

Therefore, if an NAB shareholder wanted to take out a $15,000 cash advance to plough into its SPP this week, that would be a fee of $234. It's absolute highway robbery – and that's on top of the exorbitant rates.

Bad debts coming down

The most important news in the Commonwealth Bank's full year result on Wednesday was that bad debts are starting to come down. In full-year terms, these CBA bad debt provisions look dreadful:

2001-02: $449 million
2002-03: $305 million
2003-04: $276 million
2004-05: $322 million
2005-06: $398 million
2006-07: $434 million
2007-08: $930 million
2008-09: $2.935 billion

But when you break it down into half years, it paints a different picture:

$195 million, December 2006 half
$239 million, June 2007 half
$333 million, December 2007 half
$597 million, June 2008 half
$1.607 billion, December 2008 half
$1.328 billion, June 2009 half

Commonwealth Bank won't recover the $500 million they've written off on ABC Learning, but other known "names" such as Centro are starting to look a whole lot more promising as property and equity markets recover.

This list tracks big four bad debt provisions since 2005 and it was no wonder share prices came off when annual provisions leapt from about $2 billion a year during the boom, to an annualised figure of more than $12 billion over the past 12 months.

CBA's June-half result was the first time that bad debt provisions had dropped in 16 half-year results by the big four Australian banks, so it really should be seen as a major turning point. The fact that CBA came through its worst year of bad debts and the biggest credit crunch since the Great Depression with nothing worse than a 7 per cent dip in full year earnings to $4.41 billion is quite remarkable.

Sadly, the simply answer is that the big four banks are ripping off ordinary Australian by abusing their market dominance. Financial services companies should be just like any other boring utility generating modest returns providing an essential service to the community and facilitating the smooth operation of the economy.

In Australia we've let financial services companies once again become almost 40 per cent of our entire stockmarket. Talk about hoovering up the value chain. And most of them barely make any money offshore - with the exception of New Zealand where our banks dominate and ANZ is actually the largest company by revenue.

Time for government to intervene

ACCC chairman Graeme Samuel has been loudly complaining about CBA's purchase of BankWest and with the disappearance of St George, RAMS, Wizard and Aussie Home Loans into the bellies of the big banks, Australians are facing less choice and more dominant financial conglomerates than ever before.

Whilst John Howard and Peter Costello were loath to take any direct action against bank gouging, the Rudd Government demonstrated with its broadband assault on Telstra that it was prepared to go the knuckle with corporate giants if necessary.

For mine, regulatory intervention represents a major potential downside for big four share prices. For goodness' sake, CBA has run so hard that it is now trading at 15 times earnings, 2.2 times book value and the dividend yield is down to 5 per cent. And the more big bank shares surge – the sooner the Federal government will unwind the exceedingly generous deposit and wholesale funding guarantees.

The cacophony of complaints about bank abuses are popping up everywhere. Major corporates are sick of having their interest margins dramatically widened and small business has seen nothing like the relief given to the politically more sensitive home mortgage borrowers. And for all the Ralph Norris warnings about rising funding costs and hot competition in the deposit market, CBA's net interest margin actually widened from 2.02 percentage point to 2.1 percentage points over the latest half year.

Norris told ABC television yesterday that Australia could have suffered credit rationing without the government guarantee, but now that his bank has $80 billion of liquidity and oodles of freshly raised capital, there are no more excuses for Australians to continue suffering the world's most expensive banking system.

Stephen Mayne, a shareholder activist and publisher of The Mayne Report, contributed this article to BusinessDay. Earlier columns on capital raising plays can be found here. He can be reached on stephen@maynereport.com.

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