Wry & Dry

Westpac CEO's extraordinary claim

In a most extraordinary speech, the CEO of Westpac, Brian Hartzer, yesterday said that banks are different to other businesses and should be treated 'differently'.  

And that the massive returns they deliver are necessary to attract international capital.

Bollocks.

Justifying oligopolistic profits, extraordinary executive compensation and malevolent behavior of some employees with an appeal to national economic sentiment has no clothes.

Next he will be saying that the massive profits are a matter of national security.  And thus get the National Party on board.

Good grief.

Westpac's massive media communications department was in overdrive hammering home the issue media, along with Mr Hartzer's pledge to abandon product-sales' commissions to its 2,000 tellers.

Err, what about the product-selling commissions paid to Westpac's thousands of financial planners and insurance salespeople?  No mention of that inconvenient truth. 

Certainly, an economy needs efficient and profitable banks.  But Australian banks are in a league of their own in term of profitability.  

A return on equity of over 15% when the 10-year government bond rate is about 2% is profit gouging.

And even the new Chief Teller at the Reserve Bank, Philip Lowe, said yesterday that banks' profitability should decline, "I would expect that, over time, the return on equity in the Australian banking system would decline, because the rate of return on every other asset class has declined".

But don't let W&D be the sole judge of we-the-customers' attitude to banks.

Consider the following...

The Australian government guarantees the first $250,000 of any person's deposit with a bank.*  And that means $250,000 with multiple banks.   As there are 113 guaranteed institutions in Australia, that means W&D readers can deposit up to their first $28.25m with a 100% Australian government guarantee.

So why is it that only 51% of Australians believe that their bank can "keep my money safe"?

Banks not trusted 2

But, wait.  There's more.  And it gets worse.

Only 20% of Australians believe that banks will "provide me with unbiased advice".  That doesn't mean to say, of course, that they won't take advice that they know is biased from their bank.

So, just think about that.  The government provides a guarantee and still only 51% believe their money is safe.  Perhaps the response related to assets other than deposits.

Either way, the banks have a lot of work to do.  But it's a bit too late to recoup the fabulous bonuses paid to former CEOs, senior executives and product salespeople for the tainted profits made in the heady days leading up to and just after the GFC.

So, Mr Hartzer, before you again plea that massive profits and attendant massive compensation is necessary for the economy, listen to what your customers think.

But, W&D predicts he won't.  What W&D will predict is that his justification of banks' massive profits will become more and more widespread.  The cause will be taken up by other bank CEOs.

This is what W&D calls 'accessing the Overton window'#.  The Overton window is the concept that an idea's political viability depends mainly on whether it falls within the window of public acceptance.   But an idea or theme can start outside the political or social mainstream, but once it has been stated, argued for, reframed and restated, it can become thinkable and acceptable.  And thus enters the Overton window of public acceptance.

Whilst the Overton window concept primarily relates to political ideas, W&D is comfortable in using it as a frame upon which to discuss bank profitability.

That is, the banks will increasingly use Australian economic necessity as justification for their massive profitability.  And aim to access the Overton window of public acceptance.

*Or more correctly, any Authorised Deposit-taking Institution (ADI).  ADIs include banks (including foreign subsidiary banks - but not branches; so Bank of China Ltd, Citibank, N.A. and ING Bank N.V. are not covered by the guarantee), building societies and credit unions.

**The EY study covered 55,000 consumers in 32 countries, with 2,001 responses in Australia.  Only the Australian responses have been extracted.

#The Overton window is a term from political science referring to an acceptable political or social thought in a culture at a given moment.  It was the creation of Joseph Overton, who died in 2003.