Fat dividends are the primary reason why Australia’s big four banks have pushed most mining stocks out of the top 10 on the Australian Securities Exchange and, while investors might think bank shares cannot rise further, they might be pleasantly surprised if an overseas job-slashing push arrives here.
Bank staff will be the big losers in the emerging international trend to further ‘computerise’ financial services, a development being forced on European and North American banks by their poor profit results over the past five years.
Australian banks do not need any extra help when it comes to making profits, having avoided the worst effects of the 2008 global financial crisis, a point reflected in sharply higher share prices.
Westpac, for example, has seen its shares rise 62 per cent over the past 12 months from a low of $20 to recent trades around $32.50. Commonwealth Bank and ANZ are both up 47 per cent and National Australia Bank is up 49 per cent.
Collectively, the big four banks are now valued on the market at $373 billion.
Another result of strong bank share prices is that only one mining stock remains in the ASX top 10, BHP Billiton, which has slipped to second spot behind Commonwealth and could soon slip to third if Westpac continues its rise.
Commonwealth has a market value of $115 billion. BHP Billiton’s ASX-listed shares (it also has a London listing) are valued at $101 billion. Westpac is valued at $100 billion, ANZ $82 billion and NAB at $76.7 billion.
European and North American banks are valued at a fraction of the Australian banks because of their sharply lower profitability, a factor in the drive to streamline their operations, including big jobs cuts.
Australian banks might not need to follow but what the Europeans and North Americans do over the next few years will flow across borders and could be copied here.
Britain’s Barclays Bank is contemplating a 30 per cent cut in its already depleted workforce to boost profits, a reduction which implies the elimination of 40,000 jobs.
Social and political pressures are all that stand between Barclays moving swiftly on its plans to use technology to streamline back-office paperwork processing, with one report suggesting that because so many banks survived 2008 with the aid of taxpayer-funded handouts they might be loath to cut too deeply, too quickly.
But that same report, carried by the Reuters news service, said the recently appointed chief executive of Barclays, Anthony Jenkins, was keen to tackle poor productivity in financial services by applying “Toyota-style production line systems” of the sort that revolutionised car making by replacing people with machines.
Swedish banks, which also dodged the GFC, have been major users of new technologies to replace staff, producing much higher profit margins than the British banks.
If, for example, Barclays used the same systems as Sweden’s Handelsbanken, its profit would double.
Telecommunications is a second example of technology replacing jobs, with the automation revolution of the 1990s delivering cuts of between 30 and 50 per cent in costs and jobs.
Australia’s banks, which have seen their share prices rocket thanks largely to not passing on the full benefits of falling interest rates to customers, will be closely watching the overseas cost-cutting developments to see if they could generate the next wave of higher profits.
Investors will be cheering. Bank staff will not.
Ready to cash in
Ikea is the best example of reinventing a human essential, furniture, and turning it into a global business but it’s not the only example.
Pret a Manger, a name which means ready to eat and is derived from the French expression Pret-a-porter (ready to wear) is a British business which has reinvented that most British of foods, the sandwich.
Not well known in Western Australia, except to international travellers, Pret a Manger is on the move after another outrageously successful year, which saw sales and profits rise 20 per cent and the number of stores expand by 36 to 323 worldwide.
The reason the rise of Pret a Manger should be of interest here, is that the business model is so marvellously simple and, in theory, easy to mimic – before it arrives in Perth.
Selling gourmet sandwiches might not be everyone’s idea of making money but what Pret a Manger has done is grow a simple concept which started at London’s Hampstead underground rail station as recently as 1986 into a business which has annual sales approaching $1 billion and profit of about $94 million.
Expansion into the Asian region has started, with two outlets in Hong Kong and more planned as the company opens up one new store a week during 2013.
As if to underline the common thread, which links Pret a Manger with Ikea and the way in which a basic product can be reinvented, the British parent company has just recruited a former Ikea president as a director.
Who said the wheel cannot be reinvented?
“After politics, journalism has always been the preferred career of the ambitious but lazy second-rater.” Gore Vidal.