The difference between home loans and banana smoothies
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Westpac continues to be attacked in the press after Australia’s largest bank raised variable home loan rates by 45 basis points last week, almost double 25 basis point rise announced by the Reserve Bank. The man who announced the changes, Westpac retail boss Peter Hanlon, was quietly shifted to a new role only days later, while one of the world’s most powerful businesswomen, South African-born Gail Kelly, has endured possibly the most difficult week of her corporate life. Westpac’s problems didn’t improve this morning after Fairfax’s Julian Lee reported that “according to Westpac, mortgages are much like banana smoothies and the cost of borrowing money little different to that of buying bananas”. A resent email sent by Hanlon to bank staff had attempted to compare the recent increase in Westpac’s mortgage rates to the higher cost of banana smoothies after the devastation of Cyclone Larry. Westpac claimed:
We all understand the formula. A + B = C. But the same formula is so much harder when it comes to talking about money. In 2007, the world of money changed. The money that banks needed to buy started to cost them a lot more, just like bananas for smoothies. The problem with Westpac’s comparison is that the markets for banana smoothies and home loans are completely different. The first major distinction between the markets for banana smoothies and home loans is supply. Anyone with a blender and 20 square metres of retail space is able to start selling smoothies. By contrast, it is somewhat more challenging to open a major bank and offer finance products. In particular, the billions in capital costs it would take to create a major bank led to a fairly substantial “barrier to entry”. Banks are also highly regulated institutions operating in a somewhat less competitive market. Following Westpac’s acquisition of St George and Commonwealth’s purchase of BankWest in 2008, the Big Four banks now dominate the home lending market (almost every home loan made is by a Big Four bank). This has been furthered by the federal government’s funding and deposit guarantees, which substantially favoured the Big Four banks over their smaller competitors. (By contrast, the federal government did not announce a special Banana Farm Guarantee, in which the four largest banana smoothie stores would be permitted to purchase bananas from overseas farms with the benefit of a government guarantee during the “banana crisis” of 2006). The next major difference between bananas smoothies and home loans is that smoothies are a low value, short-tail good and customers can readily switch between sellers. Simply put, you can easily buy a banana smoothie from one store one week and switch to another store one the following week. By contrast, it is extremely difficult to switch home loan providers because home loans tend to last for decades (Westpac, of course, is well aware of this). Apart from expensive break fees, customers will often have numerous other accounts or products with their home loan provider, as well as direct debits and other items attached to their account. For the sake of perhaps $600 annually, it is almost certainly not worth the hours of hassle (and thousands of dollars in immediate expense) for the customer to switch banks. Not only that, but there is no guarantee the rival bank won’t lift rates by the same amount in the next period. There is one other small difference between banana smoothie sellers. That is, executives of banana smoothie retailers (who arguably operate in a far more competitive market with more sellers, homogeneous products and less barriers to entry) are paid far less than banking executives. Westpac’s top 16 executives shares in $42 million last year, most of which was paid in cash. While smoothie sellers do not publish their annual remuneration figures, we suspect that few smoothie employees take home such largesse. The decision by Westpac shows the fallibility of yet another celebrity CEO — Gail Kelly. Kelly was hired by Westpac in February 2008 from St George, replacing the respected David Morgan. Since then, Kelly has undertaken a costly acquisition of her alma mater (which has led to the bank already writing of $500 million) and now completely bungled the bank’s interest rate policy. (Westpac’s rise allowed not only NAB’s position to improve after the fourth largest bank announced a 25 basis point rise, but also allowed rival CBA to escape relatively unscathed despite itself raising rates by 37 basis points). While business banking (and credit card) consumers have had a far more torrid time than home loan customers, Westpac did not (publicly anyway) note that its higher home loan rates have been offset by lower business loan rates (the Commonwealth Bank advertised today that its residential-backed business loans are cheaper than Westpac’s). Rather, Westpac has claimed that the rate rise was necessary due to increased costs of funding as a result of the global financial crisis. However those arguments are difficult to believe given the bank’s earnings do not appear to have been adversely affected by the crisis. Westpac’s reported cash earnings last year were $4.67 billion, compared with $3.5 billion in 2007. This does not appear to be a bank in desperate strife. Meanwhile Kelly’s salary rose from last year $6.1 million to $8.4 million. It appears that victims of the global financial crisis are equal, but some are slightly more equal than others. |
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22 Comments
^ “Meanwhile Kelly’s salary rose from last year $6.1 million to $8.4 million.”
There’s your answer.
… Volunteers to give Gail a banana smoothie enema?
The only thing which would restrain this self serving orgy of rent seeking would be a nationally owned bank. It could actually use a government guarantee to offer cheap loans and this would have a salutory effect on the competition. Regrettably for the in hoc everywhere, it has been free market mantra that you can hand monopolies or oligopolies to corporations and then, by the very magic of the superior moral fibre of the kind of person who earns $8.4 million a year, social responsibility will ensue. We used to call in Noblese Oblige, until we worked out that it seemed to result in lots of people living in awful conditions and dying of TB and replaced it with legislated obligations. So you get the corporate feudal state you pay for.
The other big difference is that having agreed a price for the banana smoothie with your smoothie vendor, he cannot unilaterally increase the price when you’re halfway through it…
Was that a RE-SENT email or one we should be bitter about or both?
What’s up with the Westpac website?
The link the Westpac’s current homeloan interest rates has disappeared and when you drill down to individual products their variable interest has not been updated, The current variable interest rate should be 6.76% (6.06 + 0.25 + 0.45) as confirmed by their homeloan customer service team after 15 minutes on the phone.
Please note that as of 9.12.09 this rate still has not been updated on their website - obviously they don’t want their customers comparing interest rates with their compeditors by deleting the page all together and treating their customers like a bunch of monkeys!!!
Just be honest about your interest rates and treat your customers with some respect!
David
Ms Kelly should be shipped back to Sth Africa and check out her chances of earning 8million bucks a year in her homeland. I doubt under the present regime there, she would have a monkeys big smoothie chance. Of course much easier to swing and sway the Aussie way, its so easy here, forget going back to the leafy, white, barbed wire fences of South African suburbia, until the Aussie bank account can keep her in the lifestyle worthy of a multi millionairess
@Altakoi: We have a nationally owned bank - the Commonwealth - but we sold it. Repeating the process isn’t going to help. If the banks can pay for patronising crap like the smoothie ad, they can do without the government guarantee.
Yes, the folly of selling the CBA when it had a charter of lending cheaply for development projects etc is what I was getting at. The government guarantee is a whole other kind of moral hazard, because it basically allowed all the banks to go out and lend on the international market with the tax payer taking all the downside. And, of course, the upside goes to ad agencies and executive payouts.
I mean “borrow on the international market”
I seem to be developing a typing disorder.
I bought my “banana-smoothie” home-loan from Westpac **BEFORE** the storm rolled in - “forcing” prices to go up.. So why should I now pay them more..
I bought a banana-smoothie the week before the storm forced banana prices to go up. I do not plan to go down and pay the vendor another 50 cents - since banana prices are more expensive now.
@Altakoi: here, here… Indeed, Ben Chifley, the postwar ALP prime minister, boldly attempted to outlaw private banks as part of his democratic socialist agenda (remember the old ALP - you know, the one who actually did something for ordinary people?). Not surprisingly, the establishment was horrified, and did their utmost to prevent it, which eventually led to the High Court’s ruling the bill unconstitutional. How convenient! Anyway, here we are, sixty years later, in a state-funded capitalist oligarchy, in which banks and other dominant businesses can be as risky as they like, because they know the good ol’ proletariat will always be there to bail them out when their exploitative programmes go pear-shaped.
RAYMONDCHIRCH - absolutely no need to bring in your ignorance of what it is like to live in SA, or why people leave. should i compare all australians to any single one of my choce - i have a long list ….
ck as you well know it is universally documented just what the living conditions in SA are today. But as my remarks were about the Westpac boss as an individual NOT Sth Africans overall, your defence of this woman tells me something.
Forever known as the banana bank
RCHURCH - i dont believe i mentioned one word about gail Kelly, so it is remarkable how you have deduced my opinion of her. I have not reacted to the article, only to your slight xenophobic attack. you mention “white” in your description of SA suburbia if you are referring to the paint colour of the houses, yes white is included, if you are referring to the colour of the people who live in the houses, yes white would be included. white however is not the exclusive adjective for these suburbs (either way)….. by a long shot. incidentally GK could probably earn equivalent if not more in SA. do more research.
I repeat my remarks were about Ms Kelly. You quickly took a bait that was not there. Something simmering under the surface I suspect with you. Anyway point made.
ps All Blacks for the World Cup 2011
((((For the sake of perhaps $600 annually, it is almost certainly not worth the hours of hassle (and thousands of dollars in immediate expense) for the customer to switch banks. Not only that, but there is no guarantee the rival bank won’t lift rates by the same amount in the next period.)))
The problem for SME’s is even more complex than the normal home loan when it comes to refinancing.
SME’s are not really concerned with the cost of refinancing due to the tax deductabilty of the fees….their problem is actually finding another bank that is prepared to take them on when credit gets tight. The holding banks realize this ( the unwritten code ) and usually screw harder.
Someone said that before Gail Kelly can be sainted she would have to be martyred….ok, martyre her!!!…see how she goes running an SME with 10 to 20 employees. Like the rest of her ilk, she would flounder and collapse without the support structures of a big corporation.
I tried to pay for 4 chocolate croissants and a sandwich cut wholemeal loaf with bananas and the refusal to take my WestPac approved tropical fruit currency was embarrassing. Oh and by the way they don’t fit in wallets very easily.
Raymond Church:
I did n’t realize she was from SA….come to think of it, she certainly fits the profile…you know, square-head and all…hahaha. Come on you SA’s, get over ya selves and get those chips off your shoulders.
Dankie!!!
It would appear that the advertising company that has been trying to get CBA’s business with ridiculous humorous promotional gimmicks has at least got a gig with Westpac (official bank of The Banana Republic.)
Who needs the bank? Ive just invested in bananas and by the way westpac tells things im going to make a motza!