Banks in a Vicious Circle

It is no fun being a bank according to Finnish banks today – our banks, like many others, are currently complaining about three things most of the time:

    1. Too much regulation hurts earnings
    2. Governments not doing enough to stimulate our economy. 
    3. Negative interest rates hurt profits

They claim that the three above points are hurting their ability to earn a decent return that causes their share prices to remain low.

It is certainly true that some banks are having problems running their operations profitably, and it certainly true that their share prices have fallen – but these complaints…

When banks complain like this then it is good to see if the above reasons are really hurting their earnings and causing their share prices to fall. 

Could there be other reasons for poor returns and falling share prices?

The three biggest banks have an 80% market share

This alone explains that life has been comfortable without true competition. A lack of competition leads to a lack of agile and innovative management. You just need to follow one another and not rock the boat when the market is effectively run by an implied cartel. 

Staff costs are almost always at the higher end of the wage spectrum

Most banks have heavy organisations with CEO’s and senior management taking home annual pay checks of €1 million and more – that goes for all the big bank here in Helsinki. 

Many of the top traders, brokers and analysts also enjoy hefty remuneration. Bank staff costs are generally much higher in relation revenues compared to the industrial sector.

Banks are run with high operating costs

Banks have expensive and, in most cases, fancy offices, large advertising and PR budgets. When the S-Group opened a bank in their retail shops, incumbent bankers were surprised that a bank could downgrade itself so much. Don’t bank customers expect to see fine marble floors and mahogany desks with grand oil paintings and other works of fine art hanging around, they thought.

IT costs are not controlled well

IT investments are also high because banks consistently appear to end up paying much more than the original IT budgets. IT solutions seem to require huge outlays for consulting fees because in-house competence for IT is limited. Many banks are still using legacy (old) software to perform daily tasks, because upgrading is expensive and complex.

Consultants and lawyers milk banks

… so more consultants are employed for Asset/Liability and Risk Management because the mathematics and rule books are quite hard to understand, especially if you are a banker… this has been a big growth area for consultants because the 2007 financial crisis brought many bad practices to light. 

The Panama Papers have shone a light…

… and lawyers’ fees are high because banks have run-ins with the Financial Supervisors who have discovered that some these banks have got involved in money laundering and other nasty habits. Getting to “Know Your Clients” – the famous KYC – is tricky for bankers when you have to spend time with ordinary folk and business men and women. 

Supervisors try to protect taxpayers with complex rules

…… and more lawyers are employed as advisors to sought out how new regulations should be applied and how to fire staff, draft loan agreements, bond issues, share issues, prospectuses and stock exchange notices, and other complicated documents. 

Most banks compete on price, not on service quality

The best is for last… The big banks mainly compete on price and on nothing else. When they want to win a bigger market share they lower their fees and margins to win big volumes from clients. After 12 or 24 months these lower fees and margins start to hurt absolute returns. The other banks generally hold their fees and margins as long as possible and see reduced income. This period of scarcity is then followed by cries of the three complaints. They blame everybody except themselves because admitting mistakes is never done by any banker. It is always somebody else…

Diversity is lacking at the top

The management of banks and their boards are stuffed with groups of men and women that often lack diversity and the necessary skills because they tend to be appointed from within their own organisations, or their colleagues who will not raise too many difficult questions. If the board does not challenge management then…

Most big banks treat private customers like cattle

Ordinary private bank customers tend to confirm that the smaller Finnish banks give much better customer service, while customers of the largest banks tend to complain about the lack of good service or its absence! Getting good service for your true needs from a banker is hard. You will be bombarded with questions and sales pitches for expensive products if you are not careful. Some bankers are there for customers but you seldom find them in the big banks.

The conclusion is that, more often, banks have themselves to blame for this state of affairs and their constant complaints in the media should be treated, not with a pinch of salt, but with a robust rebuttal because The above reasons for these complaints are in fact self-inflicted!

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