In the Australian bank reporting season both National Australia Bank's chief executive Andrew Thorburn and ANZ's Mike Smith backed away from ROE targets, citing the uncertainty of regulatory capital requirements. Tidjane Thiam, the new Credit Suisse chief executive, has also refused to set a return on equity target.
In Australia however the ROE target has political dimensions absent from the northern hemisphere.
Lex's complaint was missing targets “has become standard in the European banking industry”.
“Regular target changes suggest a lack of clear thinking internally about what the bank is trying to achieve,” the column opined. “It would be far better to create a simple, short list of objectives on a select few core metrics, stick with them, and not create any more until the first set has been achieved.”
In Australia though the complaint is the ROE targets themselves – and by implication the profitability of the banking sector – are too high.
There's of course an irony in this: many compare the ROEs of Australian banks with European or American banks, the very banks which trashed their earnings during and after the financial crisis and continue to annoy commentators like Lex.
So Australian banks, which performed solidly during the crisis, didn't require taxpayer bail-outs (and actually paid taxpayers for backstop guarantees) now must defend their greater profitability.
The political dimension of this of course is the debate around the price of banking products, particularly standard variable rate mortgages and credit cards. Each price increase – higher interest rates – is compared with what some argue is the too-high ROEs in the industry.
To the extent price rises are reflecting an increase in the cost of doing business – particularly the regulatory cost – the argument is shareholders should pay that cost by way of lower earnings rather than customers.
Yet the debate always focusses upon those to whom banks lend – consumers with mortgages and credit cards. According to the September Australian Prudential Regulation Authority banking statistics, owner-occupied housing loans in Australia stand at $A856 billion with a further $A533 billion lent to investors.
Yet the money lent to Australian banks – their total deposits – stands at $A1.9 trillion. The people who lend to banks include other banks and investment funds but households alone lend $A747 billion – and then there are small businesses, charities and entities like bodies corporate.
Typically, and more so in an ageing society, the rate of return on deposits is a crucial income stream for lenders to banks. The self-managed superannuation fund industry has extensive cash holdings, often invested in simple deposit products.
Yet missing in the debate around who pays for a safer banking system are these depositors. It's rare to see a politician say “let's not forget the depositors who are also impacted if a bank elects to keep mortgage rates lower”. Because one of the dynamics of bank profitability is determined by the margin between what banks borrow at (including from depositors) and lend at (including to mortgage holders).
Underlying all this is the question of just what a bank's return on equity should be. And there is no easy answer because the answer is it should be high enough to compensate an investor for the risk they are taking and compare favourably with other potential investments.
NAB's Thorburn said last week his bank's cost of capital was around 11 per cent so it needs to be higher than that. But what's the appropriate risk premium?