Banks are showing major profits again, bad debts are reducing fast, emerging markets are growing fast and bonuses are good, so all things are back to normal on the Good Ship Lollipop.
Or are they?
Certainly profits are looking positive as Societe Generale, UBS, Barclays, Deutsche Bank, Bank of America, Goldman Sachs etc all posted great returns in the last week or so (ignore ING and Credit Suisse), but profits and returns aren’t the whole picture.
There’s a few murky waters underneath.
First, are the profits real?
Some might say that a large chunk of these profits reflect the overly cautious write-offs of debt that the banks made in 2008 and 2009, when the crisis was at its worst.
Mortgage defaults and corporate bankruptcies haven’t been nearly as bad as the scaremongers feared and so debts are now being revalued and re-evaluated.
Such revaluation reflects a leap in profits from written off debts to written back revenues.
Second, the world has changed.
There is a big fear amongst the large banks with investment arms that those investment houses will be shut down.
Between Dodd-Frank, the Volcker Rule, the European Commission and the Independent Banking Commission, everyone is starting to hint that ‘casino capitalism’ – a term I hate but used widely in the media – is going to be outlawed.
This reflects a future where the investment world is run by hedge funds and private equity, as trading off their own book of business is no longer allowed in banks.
Third, banking hasn’t changed (yet).
The reporting season we are seeing right now is one where banks appear to have returned to some sort of normalcy. A kind of pre-2008 sense of success has come back and, even with all of these rumours of new regulations, where are they?
Sure, there are moves afoot amongst the USA, EU and G20 to clamp down on too big to fail risky practices, but I’m at a loss to point to one piece of effective new regulation introduced since the crisis hit three years ago.
And if any of you can show me one, then you’re a better person than I Gungha Din.
Which brings me to my final thought: bonuses (again!).
During this reporting season, there’s been some interesting analysis of the bonus issue and maybe the real pressure to resolve this one will come from shareholders.
For example, Barclays are awarding almost £2 billion in bonuses on their £6.1 billion profit whilst only awarding £570 million as the pool for shareholder dividends. In 2007, shareholders received £2.23 billion in dividends whilst bonuses were £1.3 billion (admittedly BarCap only had 16,200 investment bankers back then compared to the 25,000 they have today!).
Compare this with 2009, when bonuses rose to £2.2 billion whilst shareholders received just £285 million in dividends.
And there’s the rub.
As a proprietary trading firm, Barclays cannot keep throwing the finger at their shareholders whilst giving their elite traders Porsches and Yachts.
However, as banks tend to do, there are ways around this.
First, pay higher salaries in order to reduce the bonus pot … which they are.
For example, whilst Barclays announced that bonuses were down 12%, their average compensation rose 24% after you include payments from previous years, pension contributions and other income.
More interesting may be the move towards CoCo packages.
CoCo’s are bonuses paid in “Contingent Core Tier-1 capital”, which mean that the investment bankers get much of their bonus paid in the longer term and only if the bank’s Tier-1 capital remains above a certain level. If the bank’s capital falls below that level then the guys get shares in the bank, rather than cash.
Credit Suisse, Lloyds and other banks are all going down this route and it does change things.
For the better?
For the overly complex discrete coverage of what’s being paid to whom, when?
So, all in all, what we are now seeing emerge is banks back to doing well, but with far more complex remuneration, taxation and accounting structures.
Does this ensure that those who invest in, regulate and supervise them, are left wondering what’s going on?
It certainly makes me wonder.