Here's my Top 10 links from around the Internet at 11.40 am in association with NZ Mint.
I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.
I'll pop the extras into the comment stream.See all previous Top 10s here.
Apologies for the no-show yesterday. I caught a lurgy from the wife and kids. Even my good friend Panadol wasn't good enough. And I'm still not drinking coffee, which isn't helping much...but I really want to win NZ$20 off Amanda.
1. Why so confident? - The markets rallied overnight on hopes that Europe can solve its problems.
But look just a few millimetres below the surface of the political landscape in Germany, in particular, and you see plenty of potholes and hurdles for any expansion of the EFSF (European Financial Stability Fund) and the European Central Bank's role.
Chancellor Angela Merkel has to get approval from her Parliament on Thursday for an old expansion of the fund.
Reuters reports she will struggle to get the support of her own coalition partners and will instead have to get support from the centre-left opposition, which will weaken her politically.
Germany's Finance Minister has even outright denied that the fund will be expanded. And the German Constitutional court has been very vocal in its opposition.
Why are markets so sure Germany will roll over?
A revolt by Euro skeptical backbenchers hostile to further bailouts in Merkel's conservatives and their liberal Free Democratic coalition partners may leave her without a majority in her own camp.
In an internal vote on Tuesday, 11 deputies from Merkel's CDU/CSU group voted against the motion and two abstained. Coalition sources said they expected between 2 and 5 FDP lawmakers to vote against and up to 6 to abstain.
If more than 19 coalition lawmakers vote against or abstain, Merkel will be dependent on opposition votes in a political humiliation that could weaken her ability to push through future rescues.
2. And here's some more cold water for the market bulls - Ambrose Evans Pritchard reports at The Telegraph that the German Finance Minister has called the revamped EFSF a "stupid American idea".
German finance minister Wolfgang Schauble said it would be a folly to boost the EU's bail-out machinery (EFSF) beyond its €440bn lending limit by deploying leverage to up to €2 trillion, perhaps by raising funds from the European Central Bank.
"I don't understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense," he said. Mr Schauble told Washington to mind its own businesss after President Barack Obama rebuked EU leaders for failing to recapitalise banks and allowing the debt crisis to escalate to the point where it is "scaring the world".
"It's always much easier to give advice to others than to decide for yourself. I am well prepared to give advice to the US government," he said.
3. Auckland embraces unaffordable housing - Leith van Onselen has done us all a service at Macrobusiness.com.au with his analysis of the Auckland Council's new draft plan, which he describes as one of the dumber proposals he's read for some time.
It is hard to understand why the Auckland Council would even consider implementing tighter planning controls than those that exist currently. Auckland’s existing MUL has already driven urban land prices to obscene levels – according to research by respected economist Arthur Grimes, now the chairman of the Reserve Bank, this limit has made land immediately inside the MUL between eight and 13 times more expensive than land immediately outside.
In the process, the MUL has helped make Auckland’s housing amongst the most expensive in the English-speaking world (see below chart) and made Auckland more densely populated than Vancouver, Melbourne, Portland, Adelaide, Perth or Brisbane.
4. Britain's Green belts - This debate over sprawl vs intensification and how to encourage more house building is certainly a live one in Britain, where the government is looking to ease restrictions on building on green belts.
Ian Cowie from The Telegraph writes about the inevitable fallout for property owners.
Thousands of house prices could fall by a third or more if Coalition Government proposals to change planning rules in favour of developers become law, knocking hundreds of thousands of pounds off some of the most desirable homes in the green belt.
Many estate agents are reluctant to discuss this potential domestic disaster because they are linked to building and development companies who stand to gain if given a free hand to brick over the fields and meadows that make England such a green and pleasant land.
But David Pardoe, a director of Chesterton Humberts’ rural division in Salisbury, was among those willing to speak out. He told me: “It is the larger and higher value country houses that will suffer the most if developers are given the go ahead to build in green belt and other protected areas, as it could jeopardize three of the factors by which a country house is valued; its privacy levels, the views it has, and its proximity to other properties.
5. Why lower rates are no use - The Fed's Twist programme was designed to lower longer term interest rates and spark borrowing and spending by households.
But the WSJ reports here that even mortgage rates as low as 3.86% aren't working.
"At this point, the only people being helped are those who need it the least," he said. For the home-sales market, low rates will help make homes more affordable, but may not boost home buying if consumers are worried about the economy.
"Today, the buyers' concern is the falling value of homes," said Mr. Barnes. "I've had potential buyers say: 'I don't care if rates are zero if prices are going to fall again.' "
6. Lower bank profits - The FT's Martin Wolf writes an excellent blog post on how bank returns on equity have been way too high since the 1970s because they took on too much risk, which eventually meant they had to be bailed out by taxpayers. HT Dan via email.
What would you say if someone offered you an investment with a promised real return of close to 15 per cent? You might say: “How much can I buy?” Alternatively, you might say: “What is the catch?” Sensible people must take the latter view. If you thought that you were being offered a reliable real return at such an exalted level, you would buy as much as you could. This must be particularly true now when real returns on the bonds of relatively safe governments are close to zero.
So what is the catch? The obvious answer has to be that the real return in question is extremely risky, because it is volatile and offers a significant chance of total wipe-out.
Indeed, it is perfectly obvious that these cannot be sustainable safe returns in economies growing at 2 per cent a year, for such a large and well-established industry. At a 15 per cent real return, the value of cumulative retained earnings would double in five years and increase 16-fold in 20 years. Pretty soon, bank equity would be the only real asset in the world!
If a bank says it needs a real return on equity of 15 per cent, to obtain funds from investors, it is telling you that it is running an enormously risky business. The question you need to ask yourself is this: can we afford to have financial institutions that are both so large and so essential and yet run such huge risks? I suggest the answer is: no. Make them safer. It really is not going to hurt.
7. An extraordinary interview, that turned out to be too good/bad to be true - Independent trader Alessio Rastani says some hilarious stuff in this BBC interview below.
"The governments don't rule the world. Goldman Sachs does."
It turns out he's a independent trader living in a mortgaged house in a dodgy part of London. Here's The Telegraph, which found out he was an 'attention seeker, not a trader'
"They approached me," he told The Telegraph. "I'm an attention seeker. That is the main reason I speak. That is the reason I agreed to go on the BBC. Trading is a like a hobby. It is not a business. I am a talker. I talk a lot. I love the whole idea of public speaking."
So he's more of a talker than a trader. A man who doesn't own the house he lives in, but can sum up the financial crisis in just three minutes – a knack that escapes many financial commentators. "I agreed to go on because I'm attention seeker," he said on Tuesday. "But I meant every word I said."
8. Greece's Debt Crisis Odyssey - The BBC has produced an excellent flowchart explaining the various what-if scenarios in the Greek crisis.
Click on the chart for a bigger version. All the scenarios end badly.
9. Trade tensions growing - Senate Majority Leader Harry Reid plans to propose a bill next week that would allow American companies to ask for counterveiling duties against Chinese exports to America because of the overvaluation of the yuan.
A key provision of the Senate bill would instruct the Commerce Department to treat undervalued currencies as a subsidy under trade law, allowing companies to ask for countervailing duties against imports on a case-by-case basis.
Policymakers are already worried Europe's debt crisis could undermine global growth. A trade war between the United States and China would be more trouble.
The lawmakers argued China's currency is undervalued by as much as 25 percent to 40 percent against the dollar, giving Chinese companies an unfair price advantage and destroying millions of American jobs.
China rejects the criticism and last week a Chinese foreign ministry official urged the United States to "not politicize the renminbi's exchange rate because of U.S. domestic economic problems."
10. Totally Back in Black on Jon Stewart's Daily Show. "They want to take the Arsenic out of Apple Juice!"
48 Comments
It is hard to understand why the Auckland Council would even consider implementing tighter planning controls than those that exist currently. Auckland’s existing MUL has already driven urban land prices to obscene levels
Easy. Vested Interests. Many on the council and many of the elite have a lot to lose if prices go south.
I disagree, a compact city is the best option...the draft plan has outlined that more medium / high rise will be built - which increases supply right?
It's common sense to firstly make more efficient use of land within the RUB, and the RUB can also be extended outwards when necessary (e.g. Westgate, Albany etc..).
The quote below from the Draft Plan is a good approach:
"Within the RUB, urban development will be managed in such a way that there will be staged release of 20 years’ forward supply of development capacity, of which 5 years’ will be unconstrained and ready to go"
Again you miss the piont..."RUB lans being available don't meant it WILL be available"...this is private freehold land and if the owner don't wish to develop it... they won't. As it is, land owners has every incentive NOT to develop the land they own as it is rising every day and free from taxes....Beaurocrats seems to believe their every wishes will come true just because they wish so.
Then give us a Land Tax or Asset Tax to incentivise the process.
@ Kin..I understand your point...but if land is constantly being rezoned for higher density, then values won't be "rising everyday"...the problem with the MUL was that the Council's did a poor job of rezoning within the MUL for higher density...only the CBD saw proper high density.
The Draft Plan is proposing to "upzone" land in all the Metro & Local centres...and they are considering also a tax for when land is "upzoned" too.
Surely, a compact city that makes efficient use of it's land and infrastructure is better than a sprawling Auckland with higher rates (to pay for infrastructure costs) and long commutes to work on congested motorways.
Ricardo
I've worked in and around the development sector for many years. In the majority of locations in Auckland medium / high density will not stack up, even if the "right" zoning is in place (and that won't be easy - many urban centres that are spatially in the right place for intensification often have heritage qualities that reasonably limits significant new development, not to mention NIMBYism). In most low to mid value locations dwellings on small sections delivered in medium density formats will have to be sold for values substantially higher than detached houses on large full sections.
Doesn 't take a genius to work out that development won't happen in this context .
This is common knowledge in the development sector, but apparently not amongst the wise Council planners.
The current plan is doomed to fail, to kill the development industry, and result in worsening housing shortages - so much for the plan's objectives about prioritising the needs of children and families. The plan is supposed to be "evidence based", but it produces no evidence how their 75:25 goal will be realised.
Here in Adelaide the State government's 30 year plan is based on an evolution towards a 70:30 split, infill versus greenfield. But it is important to note that this is a shift over time ie within 30 years time they are aiming for 70% of annual development to be within the ruban area. The Auckland proposal is based on the idea that within the lifetime of the plan 75% of housing will be delivered within existing urban area, rather than a gradual move towards that goal.
Perth has a 55:45 split, SE Queensland 50:50 - these are realistic targets
In addition, it needs to be remembered that by new world standards, Auckland is a dense city. For example, it is much denser than Adelaide, and denser even than Melbourne or Sydney. Adelaide has a lot of brownfield sites that could be redeveloped, Auckland has far fewer.
Personally, I'd love to see a lot more higher density mixed use development, over greenfield. But its just not going to happen, unfortunately, because of the economics
"Hope and wishes can never defeat reality and facts"...I didn't say this, but whoever did is a genius.
This is from the arrogance and ignorance of Len Brown...and council beaurocrats. Not to mention the stupidity of the Greens who support him. The fact that property prices is one of the highest in the Developed world seems to escape them perpectually and the problems this caused is ignored.
Len brown is another Labour "Tax and Spend" beaurocrat as higher property prices means higher rates to pay himself with not to mention his asking 2billion for a train set that nobody will ride in sufficient quantity for it to survive. aucklanders will forever pay to keep this toy in motion once built. No mass transit train system ever makes money. In singapore (and often cited example) the total cost of its infracture is gifted by the goverment to the operators (for S$2) and the SMART is only expected to cover running and depreciation cost and even then it cannot meet its budget. In HK (another often cited example) the system is only profitable when it is given rights to develop the land over the stations. The rental and land sales covers the cost of the system....trying doing this in Auckland !!
FYI here's Bob Jones saying in The Press that the Christchurch CBD can't be rebuilt.
He compares it unfavourably to Beirut
http://www.stuff.co.nz/the-press/opinion/5695410/Bob-Jones-says-ChCh-CB…
Thats a great article and aligns with what I said above in terms of Auckland.
Pie in the sky visions are worse than harmless
Don't these planners test their ideas with development sector experts?
Apparently not
so much for the rebuild....
Matt,
Great to see you sticking up for the facts. I could not get a comment onto this site yesterday for some unfathomable reason.
I have given the Akl nonsense a good hammering in the comments on the thread across the ditch, if you're interested:
http://www.macrobusiness.com.au/2011/09/auckland-embraces-unaffordable-…
New riots in China over farmers being removed to clear the way for development.
Protests have taken place in a Chinese city for a third day, after two days of reported rioting over a land sale.
Officials said protesters in Lufeng city injured police officers and damaged government buildings during the unrest that began on Wednesday.
This is interesting at Bloomberg on Peak Oil
http://www.bloomberg.com/news/2011-09-22/oil-era-s-twilight-drives-depr…
The world economy will face shocks and depressions, punctuated by ever-shorter and weaker recoveries, as long as it relies on outdated fossil fuels, says Jeremy Rifkin, author of “The Third Industrial Revolution.”
“There will be cycles of growth, collapse, growth, collapse, every three years or so,” he said in an interview in Berlin, where he was scheduled to speak on a panel about sustainable growth introduced by Chancellor Angela Merkel.
Until the “third industrial revolution” is in full swing, debt crises such as those plaguing the euro area will recur, Rifkin said.
“The real crisis has been missed,” he said. “It occurred in July 2008, when oil hit $147 a barrel. The whole economic system shut down. That was the earthquake. The collapse of the financial market 60 days later was the aftershock.”
The Rifkin piece got a lot of attention which is good to see. However there is an even better resume of latest peakoil economic developments from Chris Skrebowski, the ex Editor of Petroleum Review (one of the well known oil trade journals), on the Oildrum
http://www.theoildrum.com/node/8410
Folk would do well to read this - and the comments section below it.
More on China's popping property bubble via Bloomberg:
The squeeze on China’s property market may be reaching a “tipping point” that drives growth lower just when exports are under threat from a global slowdown and investor confidence is plunging, said Zhang Zhiwei, Hong Kong-based chief China economist at Nomura Holdings Inc.
Land transactions in 133 cities tracked by Soufun Holdings Ltd. (SFUN), the country’s biggest real-estate website, fell 14 percent by area in August from a month earlier. Prices of new homes declined in 16 of 70 cities last month compared with July, according to government data.
http://www.bloomberg.com/news/2011-09-23/china-s-property-market-squeez…
And more on those Chinese problems via Bloomberg.
http://www.bloomberg.com/news/2011-09-27/china-developers-may-not-survi…
Chinese developers face an “increasingly severe” credit outlook, which may force them to cut prices and turn to costlier funding sources as sales weaken, Standard & Poor’s said.
A 30 percent decline in sales may leave many developers facing a liquidity squeeze, S&P said after conducting stress tests of the nation’s real estate companies. Most developers would be able to “absorb” a 10 percent sales drop next year, the credit rating company said.
Here is a channel 4 doco on Tony Blair, best watched on an empty stomach.
And more Chinese property worries here
China’s property company bonds are delivering the biggest losses in the world among developers this quarter amid speculation the banking regulator may close another avenue of funding.
Dollar-denominated debt of Evergrande Real Estate Group Ltd. (3333), Hopson Development Holdings Ltd. and other Chinese homebuilders rated below investment grade has plunged 19.9 percent since June 30, the biggest quarterly decline since the last three months of 2008, according to Bank of America Merrill Lynch data.
http://www.bloomberg.com/news/2011-09-26/world-s-worst-property-bonds-p…
Regarding (7) it's different again. Leighton Smith on ZB seems to have tracked him down to some type of English comedy outfit that have managed to suck BBC in (yet again). Apparently Rastani's last comic appearance was fronting a fake Bhopal gas disaster (1984) interview ...
A few more heads may roll at BBC ... not checking sources, et al. But that's the MSM for ya.
Yesterday that video clip got posted here on 5 separate occassions , starting with Andrewj , then Walter Kunz put it up , bourbon , and two others !
... way to go guys .
Ummm , steven ... don't take it to heart !
[ .. it was superb , so well done , and some bloggers here simply latched onto that " Goldman Sachs rules the world " bit , and ceased to delve any deeper into the content of what he said ... ]
thanks Tribeless......
And that probably explains why it was so damn good........!! If it looks too good to be true..!
Bloody fantastic....gotta make you think about what you could do if you'd a mind too yes.
the closing paragraph of theTribeless link however does carry a disclaimer.....BBC Business editor Robert Peston admitted on Twitter that if there was Yes Men involvement then it was a "brilliant hoax" but later said, "We spoke to the trader again this morning and as far as we can tell he is a genuine independent trader, not a member of Yes Men".
So while the jury is out I'm going with a hilarity even if from an independent Trader..!
P.S. GBH left you a note back there ...cudos to you on the Tobin Tax comment....
Gee you have to hand it to the man, he is good:)
I saw the note , Count , thanks .
Re. the Tobin Tax , I'm still not convinced that a big chunk of that which ails the world's economy is due to speculators , nor convinced that they wouldn't find a way around it .
..... Gummy would dearly love to see a tax on central bankers ! ...... ooops , my mistake , that should've been " attacks " , not " a tax " ...
[ .. credit where it is due , " Alessio Rastani " put on a convincing and very polished performance .. ]
There aren't enough units in jails for today's "White Collar Gangsters" ruining/ running the world. Only door to door minlitary style operations in big cities would stop these glutton guys.
http://www.guardian.co.uk/media/2011/sep/27/trader-goldman-sachs-bbc-hoax
Looking into current developments on many fronts – the world will never recover again, simply because among "the powerful" in societies ethic and moral requirements and standards don’t prevail
Think he may be the real deal. A quick Google of his neame found:
http://www.smh.com.au/business/who-is-alessio-rastani-20110928-1kw8a.html
I'd be cautious about saying that Leighton Smith has "tracked down" anything. He is a dinosaur and a joke who sees things the way it suits him.
I'm not saying that Rastani ISN'T a hoax, I'm just saying that Smith has a very narrow scope and as such is not what I see as a reliable news-source.
If Rastani is a hoax, its very good. The Daily Show is a fine example of how it often takes a comedian to get the truths the mainstream media are too scared to confront.
Um, excuse me Vanderlei, but Leighton is a veritable God amongst men. A few more like him, and I'd still be a free man.
Nah a bit too manic. Some days he can be outstandingly good, and on others appallingly bad. I have grown out of my TalkbackZB phase.
Now that Aussie guy Derryn Hinch is a man amongst men.
Sorry to deflate your bubble Mr Scarfie , but that awesome Aussie guy , Derryn Hinch ... ... he's a Kiwi ..
...... psssssssssst-psssssszzzzzzzz-pssssfwoooompth ......
Jeez you are all doom and gloom Gummy, bursting bubbles everywhere:-P
That reminds me the story:
One party's top and the second come to solution how to improve lagging statistics:
Top said - "I'll propose the certain weeds to be decriminalised and you - the second - you do oppose me"
Second said - "That's perfect idea - we will be in the papers and TVs all over"
Top said - "At least we will talked about - for a while...."
Conclusion: Do "something" to be known and famous.
Are you suggesting the Good Dr does not partake of the herb of wisdom.....? I suspect he had not vetted his bully boy front man to gauge the level of his anal retent.
What the Good Dr has done inadvertently is given someone else the opportunity to roll him......untill he is a Nowhere Man...sitting in a Nowhere Land...making all his Nowhere plans for nobody..........................a smoke will come in handy if my guess is right...that aside I'd like to see him pop the little bully bas$%rd even if just euphemistically..!
http://www.youtube.com/watch?v=O_w_x_mwxPU
Peter Oborne on Politics Cross Party Collusion and Corruption
Very good video - Peter could easily be describing NZ's politicians.
Somehow I think China should be able to weather the storm. It has in excess of $3 Trillion reserve which it can use. And when that runs out, it can still do it the American way - print money.
Billy
How can China use those reserves to bolster demand in its own economy?
Sucking that money in just pumps up inflation.
Those reserves are already in US Treasuries and European bonds.
It would just be a shuffle and the Chinese are very keen to reduce their reliance on these forms of foreign reserves.
That's why they're keen to invest elsewhere.
Hence today's announcement of a deal via PwC to lend into Christchurch by the China Development Bank.
cheers
Bernard
Nice link to German video showing ESM dictatorship = loss of sovereignty via blogger Frenchnews at telegraph.co.uk:
German army report on Peak Oil, PDF available (English translation)
#4.
George Mombiot:
There’s no mystery about why the reform is going in this direction. As the planning expert Andrew Lainton reveals, the government’s presumption in favour of development was first proposed by Policy Exchange(15,16,17), one of the “thinktanks” which refuse to reveal their sources of funding and which look to me like corporate lobby groups(18). The foreword to the Policy Exchange report was written by Lord Wolfson, a Conservative peer who also happens to be chief executive of Next, which builds out-of-town shopping sheds.
The Telegraph, which has a lately become a surprising champion of power to the people, has revealed a series of stark conflicts of interest. It has uncovered a new cash for access scandal, in which property developers pay £2,500 to the Conservative party to make their views known to members of the government(19). It reminds us that the co-author of the new planning framework happens to direct a consultancy which works for ASDA and other big developers(20). It has published a leaked email from the British Property Federation, which shows that the planning minister, Greg Clark, has secretly urged the BPF to send letters to the press and to lobby David Cameron(21). The government’s objectives, the email says, “definitely align with ours”.
The Wullies – build Whatever You Like, Wherever You Like – have their hand in the glove of government. They have portrayed this as a fight between green and brown, town and country, growth and stagnation. It’s simpler than that. It’s a fight between corporate power and democracy.
http://www.monbiot.com/2011/09/26/war-with-the-wullies/
In the Telegraph last week, Geoffrey Lean claimed that the assault on sound planning has been caused by young metropolitan wonks in the coalition replacing “the old grouse-shooting knights of the shires”(3). In fact it is the grouse-shooting knights of the shires, through their Country Land and Business Association, who have led this attack on the planning system. When faced with a choice between their ill-defined “rural values” and making buckets of unearned cash, there’s no doubt about where the shot falls. This is the reassertion of old power against democracy.
http://www.monbiot.com/2011/09/05/terra-nullius/
Re:
NZ nears top of global reputation stakeshttp://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=107…
Other results showed that the USA only ranked halfway in the overall rankings while Pakistan, Iran and Iraq were seen as having the least favourable reputations among G8 nation residents.
Global reputation:
1. Canada
2. Sweden
3. Australia
4. Switzerland
5. New Zealand
6. Norway
7. Denmark
8. Finland
9. Scotland
10. Australia
- NZ HERALD ONLINE
Typical Australians getting on the list twice.
Re 4
Britains Green Belt is more like a green noose. The vast majority of the population are coralled into an extremely small area while a few elites- increasingly foreign* , just to add in a further complication, occupy The Green Belt.
http://www.guardian.co.uk/lifeandstyle/2011/aug/07/tim-adams-who-owns-b…
Who Owns Britain sets out the figures pretty starkly: the UK is 60m acres in extent, and two-thirds of it is owned by 158,000 families. A staggering 24m families live on the 3m acres of the nation's "urban plot" – and not surprisingly buy into the idea that Britain is a severely overcrowded country in which land is extremely scarce.
The whole green belt is a simple con, the poms have been sucking it in for 1000 years. Today they are safe in the belief that it is all for them, of course it isn't. The place is not over crowdedat all , it is just that the vast majority of them don't own any meaningful amountof it nor have access to most of it- except for walks along presrcribed paths and are forced into small urban bantustands. They carve A roads through villages while leaving the neighbouring Giant Estates intact, safe behind walls so long and tall they would not be out of place in the West Bank and Gaza
* Of course they have really been foreign since 1066
FYI from a reader via email:
Bernard
What do you think about gold as an investment at present?
Do you know that the RBNZ owns not one ounce of the precious metal and is
practically the only country in the world that doesn't?
I have had this confirmed by the RBNZ in an email after I inquired.
As most other central banks around the world are trying to buy as much as
they can because they have serious doubts about the future of fiat
currencies as we know it, does this seem odd to you? Is NZ, yet again,
behind the 8-ball or do you think the fact they are only invested in
(depreciating) foreign currencies the way to go?
Thanks!
Pinkorchid,
Many thanks for your query. I don't have a strong view on gold. Ultimately it depends on how worried you are about inflation and money printing.
I'm less worried than I was. But again, your call on that.
cheers
Bernard
Pinkorchid......it would be quite improper for Bernard to dole out advice to you one way or another as he is an observer who is under oath to maintain journalistic neutrality.....your better to ask ....hmmmmm...say ....Wolly when he pops up again...! he'll tell you the ins and outs.
Re Martin Wolf’s article, does a bank really have to take excessive risk to earn a ROE of 15%? And if a bank is earning 15% ROE it doesn’t mean that an investor is being offered a return of that magnitude.
Take Commonwealth Bank of Australia (CBA) as an example. In the five years to 30 June 2011 CBA has achieved ROE ranging from 16 – 22% (right through the GFC). In the year to 30 June 2011, CBA’s NPAT of A$6.4bn would be a return of 9% on the current share price of $45. This is not the best measure of shareholder return but serves as comparison to ROE. It illustrates that an investor buying shares in CBA at $45 would not be expecting to earn a share of profit representing a return of 20% on the price paid because they cannot buy shares at the book value of the underlying equity.
The recent performance of Lloyds Banking Group is at the other end of the scale to CBA. If it does achieve its stated objective of a 14.5% ROE then on its equity of £46bn at 30 June 2011 the profit result would be £6.7bn. That would represent EPS of 9.8p on a current share price of 37p and a PE of only 3.8. It appears investors are not convinced the bank will be able to hit its ROE target, perhaps not surprising given the bank’s poor recent performance and the uncertain environment.
Has CBA really taken excessive risk to earn its consistently high ROE or has it been a well-managed bank that has earned those high percentage returns on its book equity because the structure of a bank results in a low level of equity compared to total assets?
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