Wry & Dry

Australian banks: the new 'Seven Sisters' wag the dog

In the 1950s and 1960s, the seven major oil companies [1] controlled 85% of the world's oil.  And they were pejoratively labelled the 'Seven Sisters' by Italian businessman Enrico Mattei.

And rightly so.  They were a cartel out of reach of any nation's laws, seeking to profit themselves and their shareholders.  Only.  They wagged the oil dog.

But, of course, their publicity was full of saccharin goodwill gestures and programmes.

"What are you going on about?" Wry & Dry hears you ask.

Well, W&D is wondering if Australia's four major banks are the new black; the new Seven Sisters (albeit they are only a foursome) that wags the dog.

Of course they are not out of reach of the government.  And of course they do not topple kings, incite revolutions or change countries' borders.

But they are a tight oligopoly that, with the acquiescence of an obsequious government and government agencies (notwithstanding protestations to the contrary), richly rewards its shareholders and executives at the expense of its customers and ultimately the taxpayer.

And so W&D seriously turns to yesterday's hardly surprising increase in home loan interest rates by the CBA and by NAB today.  A rate hike justified, like that of Westpac's last week, that the 'cost of increased capital must be shared by customers and shareholders'.

Piffle.

The short story is that capital is a cost for shareholders.   Hence the term 'shareholders' capital'.  The banks need more capital to make them safer, in case their customers cannot, for example, repay debt or there is a bad foreign exchange trade.

The aim is to protect their shareholders, not their customers.  Logically, the shareholders should bear the cost.

Just look at the banks' dividend payout ratios to see who should really bear the cost.

Banks dividendsThe Australian banks' dividend payout ratios are now the highest in the world amongst global competitors.  The banks' return on equity is the highest of any banking group in the world, with only Canadian banks coming close.

W&D weeps, as it were, as the banks have not only become too big to fail, they have become too big to fight.  Because they have lobbying power in Canberra second to none; an exceptionally well funded marketing communications regime and are now such a large part of the share-market, with share ownership by almost all Australian investors and savers, the government dare not tighten their leash (the increased capital requirement is but a bagatelle for the banks).

They are the tail that wags the dog.  For example, the dog didn't yelp (too much) with the banks' disgraceful financial (planning) advice shambles; doesn't yelp too much at the usurious credit card interest rates (e.g. CBA makes $1b profit on $2.5b revenue from credit cards and personal loans - nice work if you can get it) and doesn't yelp at the extraordinary compensation packages for the executives that run what are, essentially, very large building societies. 

The Seven oil Sisters used to wag the dog.  But now the Seven Sisters control just 10% of the world's oil.  

However, W&D just cannot see the day when the four Australian banks control just 10% of the Australian market.  They currently control 82.88%.  And the bovine acceptance of the banks' behaviour suggests that nothing will change.