There are two things I know about stock markets, one, they have a herd instinct and the second, they don’t like surprises.
So was it any surprise that the UK banks all posted significantly increase profits, and surprisingly because the bad debts they expected didn’t all materialise?
The herd instinct is part of the markets aversion to surprises. It is important that the CEO of a company understands that his company must perform like the others. Not in absolute terms, but in message and direction. So if every other bank is reporting bad debts and making provisions then you should too. Provisions are such useful things. They can be released later to show profit growth or simply to hide another loss that would otherwise reflect badly on the company.
The stock markets like to forecast results and it seems to be very important that companies report in line with the results. Big differences between expectation and actual results in large price movement, and this is something else the market does not like.
But the rise in bank profits is not all about the release of provisions to smooth results. The fact is that the banks have turned to their customers for support. The level of interest rates that they are charging would, at one time be seen as comparable with loan sharks. Not only has the price increased, there has also been a significant increase in margins. Before the credit crunch business credit lines were say 2% above base rate (prime rate). Today they are at least 4%. In the early days of the credit crunch the banks argued that their real cost of borrowing was LIBOR, and that Bank of England base rate, which has been 0.5% for 18 months, did not reflect their true cost of funds.
Maybe that was true for a few months, but today LIBOR is back to levels akin to base rate, but the loan shark rates still apply.
In addition to this the UK banks have introduced levels of charges that are not short of extortion.
The UK government is complaining that the banks are not lending enough to business, but the banks say there is no appetite for borrowing from customers.
At these prices is it any surprise!