One sure way to knock the banks into line

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THERE is one lever, and a very fine lever it is, that the government could pull to stop the banks hoisting interest rates beyond the Reserve Bank settings.

It is certainly not the one Joe Hockey was advocating this week, the legislation lever.

That was more of a leg than a lever that Joe was pulling. No, rather than dragging parliament in to regulate prices, there are only two words that Julia Gillard need utter to bring the banks to heel, “Australia” and “Post”.

The play for Gillard is simple: have Ralph Norris, Mike Smith, Gail Kelly and Cameron Clyne in for tea. Tell the big-four bank chiefs that a new banking licence will be issued to Australia Post (with its sovereign credit rating and 3800 branches across the land) if they have the temerity to raise rates by even a fraction of a basis point in excess of the Reserve Bank. They will comply.

Perhaps there could be a “hardship” provision attached. Should the big four’s collective profits tumble from $20 billion to $5 billion – and the big four CEO salary clip collectively, and tragically, plunge from $50 million to a miserly $10 million – the Australia Post lever could be reversed

The big four have a little secret. That is, they are making a killing rolling over their foreign funding lines as the $A goes through the roof. Roughly a third of the banks’ funding needs are sourced overseas in three and five-year notes. And the $A has rallied from US65¢ over the past couple of years, so when it comes to rolling at US98¢, it’s a lot cheaper than US68¢ or US88¢.

Customers would be lucky to find that pricing differential turn up in their bank statements.

Back to the point though: were the government to summon real reformist courage it would select a credible management and turn Australia Post into a financial services leviathan to deliver proper competition to the banks. We are not just talking mortgages here but, more critically, the provision of decently priced loans to small business.

But don’t hold your breath.

If the big miners can see off an Australian prime minister with just $7 million worth of advertising, and a PR campaign against a tax, there is little hope the government can stand up to the lobbying might of the banks.

It was a huge week for deals, what with KKR, Tabcorp and Ten. And it was further evidence, as if any more were needed, of the sheer pointlessness of investment banking.

Tabcorp announced a demerger, a plan to split its racing business from its casinos. It was only a few years ago we were being told of the need to expand into casinos to diversify earnings and achieve synergies. Good old synergies. Now we are back to “unlocking value” via a demerger. Same bankers, UBS, different spiel.

Vain and fruitless corporate expeditions are the rule rather than exception in markets.

Tabcorp is by no means alone. It follows a rich tradition of pointless and costly deals. Virtually the entire property trust sector, save Westfield, has blown its shareholders up in ill-fated ventures overseas. Now the fad is to exit funds management and get back into property development.

Expanding from beer into wine, Foster’s has squandered billions. Sigma’s bold foray into manufacturing has been shelved for its original game plan, pharmaceuticals distribution.

The list goes on. AMP and IAG in Britain, Amcor in Europe, NAB’s bewildering excursion to the US to acquire Homeside – nicknamed Homicide. Or ANZ’s “ring a ring a rosie” strategy that took it into Asia, out of Asia, and into Asia again.

Notable for the breakneck speed of its volte-face was Lihir. Its takeover of Ballarat struck for a price tag of $450 million was sold shortly thereafter for the princely sum of $4.5 million cash and the hope of a few royalties down the track.

This litany of foiled and failed mergers and acquisitions makes the performance of Wesfarmers over the years all the more commendable. The likes of Woolworths and Woodside too.

A big cap portfolio starting with W would have been a wonderful thing. Companies with a sound strategy and with discipline.

But it was Wesfarmers’s week again. The momentum is with it. Having splashed $20 billion on Coles at the top of the market in 2007, Richard Goyder’s big punt appears vindicated. Coles has beaten Woolies five quarters on the trot in sales growth, and this week even beat its arch-rival in dollar terms (increase, not absolute).

Mindful then that two out of three deals destroy value, what might this week’s deals presage?

KKR’s bid for Perpetual, for one, has a touch of Qantas about it – that piquant aroma of a private equity deal prone to benefit top staff and the predator above staff lower down the ladder, long-term shareholders and customers.

It’s no sure thing, but if the privateers win the day, they will rip the cash out, gear it to the hilt, sack as many people as possible and quite possibly mutilate the brand. Shareholders would be better off with new management instead of a quick gain now before it was floated back at them in three years corporately embalmed with too much lipstick.