lol don't get me wrong I'm not a bad guy...well atleast not as evil as thatcher, I just tend to side with the right wing occasionally on matters like economics.Originally Posted by DaBeeeenster
BTW Slick, do you have a maggie thatcher shrine in the corner of your house somewhere
So the market is not efficient? That's what you are saying right? These things should be happening, but they are not. Why not? Cost of entry is no doubt a big issue here, but then banking has a number of unique characteristics not found elsewhere. I still think that what you have said above is an argument to say that the market is not efficient and, judging by the ever increasing cost of entry, this is only going to get worse...
I am certainly not jealous of them. I have a problem with the 80's style lassiaz faire capitalism that promised "trickle down" economics but that has, time and time again, demonstrated itself to be perfectly attuned to "trickle up" economics.
"All our beliefs are being challenged now, and rightfully so, they're stupid." - Bill Hicks
IMO they deserve the profits. You DO Not have to bank with them you CHOOSE to bank with them for a reason be it product,pricing,service etc. So they must be offering something that you want, or something that other providers don't have. If they were not good at what they did they wouldn't have the customers and in turn the profits.
HSBC are a global company so it would be interesting to see how they compare with other global banks.
Also I feel that banks get a bad rep in the press when at the end of the day they are all businesses and are there to make money. They get stick for high charges etc, but the majority of these high charges come from borrowing money without asking or agranging beforehand (overdrafts).
Been reading this thread with interest for the last couple of days as it's quite interesting, so thought I'd throw in a comment or two.
Scott
This is from a counterparty analyst who has looked at both banks (these include banks, building societies, saving banks, etc.) and non-bank financial institutions (meaning insurance companies, funds, brokerages and others)...
While there are a relatively speaking a few banks in the UK (compared with somethere like the US or most of continental Europe), the UK is still considered 'over-banked' by many. However the UK market is dominated by a few very large banks which between them have around 85-95% of the savings, current, loans and mortgage markets - that's pretty much the entire retail market. Now, at first sight, that's pretty healthy market... The theory is that with several large players, and they're all out to gain higher market shares from each other, they'd out-do each other to attract customers. However, that is not what we observe here in the UK. [The following is a guess and may or may not be fact] Somehow, between all the big banking players, they've come to agreement that because between them they have such large proportion of the retail market, if they all treat retail customers (and also SME clients also) like sh!t, they'd all be winners and the only losers are the customers and clients.
As it has been pointed out, the barrier of entry is high in the banking market because of the capital requirement, branch network, technology and scale of operation. It is actually very difficult to make a banking business highly profitable. All you have to look at German, French and Italian banks a few years back. Their cost to income ratio were in the high 80% and 90%... Some even managed over 100%! At the same time (a few years back) the likes of Lloyds TSB (the world leader at the time) had cost to income ratio of around 55-60%, world leader at the time, and HSBC was around the same. To get to that kind of numbers, the banks required to invest heavily into technology, centralized processing (even from several countries) and have a very diverse range of income - and getting good return on pretty much everything!
High street banks don't just live on retail customers... What's so little money in it. Think about it: If they pay retail customers for their savings at 4% interest for the money and lend it out at 5% (to big business, who are likely to be the most credit worthy, meaning the banks are most likely to see the money back, plus interest), they will never achieve a return on equity of 20%... or even 15%. Their net interest margin is only 1p (100 basis points or 1%) in every pound. The reason why they'd never achieve an ROE of 15% in this case is because lending is capital intensive (even to credit worthy businesses) - the regulations require banks to have certain amount of capital put aside for every piece of business they do and banks' capitals are limited.
So to earn more money, they offer products to the retail clients, who are likely to have a more limited choice as source of funding. Mortgages are excellent product for the banks because they're collateralized by the underlying properties. If the punters don't pay, the banks gets the properties and get the money back by selling them. It's not as capital intensive as uncollateralized lending. Personal loans are also good products because they can slap on higher interest rates than lending to businesses - again due to the limited choice of funding. However, there's only so much you can squeeze the customers before they go elsewhere.
Investment products are only good to a certain extent because at the end of the day, the banks have to pay professionals to look after the money invested, so whatever fee they manage to get, the pot is divided... Likewise insurance products will have to split the fees with insurance providers. Brokerage fees for customers taking a shot that stock markets are unreliable because it will dry up when the stock markets don't perform well. Credit cards are very juicy! With APRs at anywhere between 15-30%, depending on who is your card issuer, the banks are getting a big fat percentage over and above the rate they're paying for the money they're borrowing to finance the customers' debt. The flip side of the coin is that credit card operations is very different from retail banking operations and it is a cost over and above the normal banking cost. Hence, it is still difficult to achieve an ROE of 15%...
That's why high street banks all have, so some degree, investment banking activities, examples:
Barclays - Barclays Capital (BarCap)
NetWest - Netwest Markets
Abbey National - Abbey National Treasury Services
They're all doing it.
Within the frame work of investment banking, they can punt the market themselves, something called proprietary trading. On the other hand they can set up operations to service the foreign currency needs of their clients (in the age of a globalized market place, nearly any business will have some foreign currency needs), so they've foreign exchange operations. Business and wealthy individuals will place overnight deposits with banks to make their money work in the very short range (and get a little interest for their trouble) and banks use this money to lend to other people who need very short-term financing. It's not capital intensive and very cheap to finance.
There's a whole load of money making activities banks can engage in and I'm not going to go through each and everyone of them.
If we go back to the example of HSBC, net interest income made up around 5/8 of operating income... However, 18% of the bank's lendings were made to other banks and another 7% out to other non-bank financial institutions. Nearly 30% of all lending were made out to corporates and commercial customers... and another 25% out to mortgages. That leaves 20% of HSBC's total lending to the juicy retail customers - and that includes personal loans as well as credit cards. Don't forget, only 30% of the bank's customer is based in Europe and HSBC owns, aside from what used to be called Midland Banking in the UK, institutions like Credit Commerciale de France (CCF) outside the UK.
In the end, we're talking about a global bank with operations in every continent on this planet, with particular concentration in Asia, North America, Europe (3rd in terms of exposures) and South America. We're looking at a banking that as diverse income bases in all sectors of the banking market - retail, commercial, corporate, investment, brokerage, etc... We're looking at a financial group with shareholders' funds of US$74.4bn... and why should we b!tch about the fact that it made an after tax profit of US$9.7bn! That's just over 13% ROE... Many investors will be disappointed about that!
Last edited by spikegifted; 08-03-2004 at 02:31 AM.
Caution: Cape does not enable user to fly. - Batman costume warning label (Rolfe, John & Troob, Peter, Monkey Business (Swinging Through the Wall Street Jungle), 2000)
A very informative post SpikeGifted; thanks for that.
Do you have any idea what sort of split the profits would be between the retail and investment sides of HSBC? I'd be interested to know that.
You hint at an oligopoly between the large retail banks. Do you think that is the case?
"All our beliefs are being challenged now, and rightfully so, they're stupid." - Bill Hicks
Well, according to HSBC's annual accounts, their Personal Financial Services and Comsumer Finance generated around 43% of profit before tax... I've no idea what's 'personal financial services' and what's considered as 'consumer finance', however, I'm guessing that the former is fairly straight forward banking products, while the latter is related to credit card-type business... 'Personal financial services' accounted for around 2/3 of retail earnings.
The oligopoly is guess work... However, it is what I considered 'edcuated guess', being a consumer who's researched into these things and being analyst who's looked at other banking operations from around the world. It may not be any formal agreements between the banks, but more like a 'gentlemen's agreement', but it sure looks like there's a cartel or oligopoly in the works. The problem with the UK market is that the big players have gotten very comfortable. While there're other giant banking groups from outside the UK that can mount a credible challenge to the large UK banks, they've only made very small efforts (most notibly Chase and Citibank, both from the US). Aside from the hurdle of entry mentioned in the previous post, there's a significantly high level of 'entrenchment' in the British consuming public - they know their brands and they'll stick with what they know, even though they suck! New entrants into the market has to take account of this and figure out how long it'd take before it becomes viable. Just look at First Direct (a division of HSBC, formerly Midland Bank) - it was started in the late 1980s and it took around 10 years before it took off... That's without any need of branches and staff, just people behind the phone lines in call centers. Don't forget, banks are in this game to make money, not act as charities - no chairman or CEO will be willing take the hit for 5 to 10 years before they see a return on all their investments.
Caution: Cape does not enable user to fly. - Batman costume warning label (Rolfe, John & Troob, Peter, Monkey Business (Swinging Through the Wall Street Jungle), 2000)
There are many comments in this thread about the rich, greedy elite shareholders who are making all this money at the expense of consumers.
As one of these rich, greedy shareholders I thought I'd add my thoughts..
OK, I'm not rich, but I am greedy and I don't have shares in HSBC, I'm more interested in small caps. The point is, if you want a cut of this pie, buy yourself some shares in HSBC! They are available to anyone, it's not an exclusive club! I don't understand why people slag off the owners of successful companies, they have simply done the right thing and invested their money wisely.
teepee some of us dont have the sort of cash lying around to invest in shares, if heard the phrase it takes money to make money??
"The less you eat, drink and buy books; the less you go to the theatre, the dance hall, the public house; the less you think, love, theorise, sing, paint, fence, etc., the more you save – the greater becomes your treasure which neither moths nor rust will devour – your capital. The less you are, the less you express your own life, the more you have, the greater is your alienated life, the greater is the store of your estranged being." Karl Marx
Then get a job!
hmm 5 quid an hour dont buy many shares..
i dont know how much rent a cop's are on these days but the ones i know can't afford to invest in the stock market..
nevermind the fact ur making money off other peoples labour..
"The less you eat, drink and buy books; the less you go to the theatre, the dance hall, the public house; the less you think, love, theorise, sing, paint, fence, etc., the more you save – the greater becomes your treasure which neither moths nor rust will devour – your capital. The less you are, the less you express your own life, the more you have, the greater is your alienated life, the greater is the store of your estranged being." Karl Marx
5 quid an hour is more than I earnt when I was your age!
Anyone who has a mortgage should be investing in the stock market. Over the last 30 years property has returned about 7%pa. The FTSE All-share has given about 13%. An interest only mortgage, with the monthly saving invested in an Index-linked tracker fund would save people a lot of money!
I'm not making money from other peoples labour. The money I invest comes from my labour (this rent-a-cop is paid by the ultra-rich people you dispise so much assuming anti-monarchy is another bandwagon you are clinging to), I simply invest it wisely. If you have any savings sitting in a bank, then the pitiful interest paid to you on it comes from exactly the same source.
It is true that the FTSE All Shares have provided an average return of 13% over the past 30 years, however, I'm sure you know why every investment prospectus has a phrase along the lines of 'past return is not an indicator to future performance'.
With regards to the performance of index-tracking funds, I have something you may not like - I've never seen an index-tracker out-perform or even matches the return of the index. There two simple reasons: fees, timing of information and liquidity and weighting.
Fees - When you buy in investment fund of any sort, you're in effect hiring an investment manager. Ok, there'er thousands of others hiring the same investment manager, but these guys have a huge organization behind them to handle all the work as well, so you'd be paying all these guys wages along also. Each fund has different fee structure: some of them are front-end loaded and others are 'flat' loaded, but that's only the administration fee. There's also the performance fee. For index-tracking funds, this is one of the most ridiculous fee. Index-trackers don't actually make investment decisions as such - they follow the index to the best of their abilities, so why pay the investment managers for being animals in a herd?
Timing of information and liquidity - Indices changes over time (e.g. the FTSE100 changes every quarter as the 100 largest capitalized stocks changes during the quarter) and that information is not released until after the market opens. When the information becomes public, the stock that has dropped out of the index will experience huge selling pressure - all index-trackers will be dumping it with few buyers! Moreover, the stocks that added to the index will experience huge buy pressure - they all try to take up the stock into the index-tracking fund and desperately looking for a seller. If the information is made available to the manager or the buy/sell decisions are made at unfortunate times, the fund loses out and you lose out!
Weighting - If you've 100 shares of every stock in the FTSE100 index, you're not tracking the index! Every company has different number of shares and since the indices are based on market capitalizations, you need to get the right number of stocks into the tracker to accurately track the index. However, just how many stocks to buy? There's always going to be inaccuracies and that's a fact of life. However, these tiny inaccuracies will come back to affect your ultimate return - never forget, fund managers are not penalized by negative performance (ie, not tracking the indices poorly) but they are rewarded by positive performance (ie, tracking the indices to +/- X%) - so either way you're not going to see all the gains you see in the index or indices.
Caution: Cape does not enable user to fly. - Batman costume warning label (Rolfe, John & Troob, Peter, Monkey Business (Swinging Through the Wall Street Jungle), 2000)
Few index trakers have fees over 1%, and most are around 0.3 or 0.4%, with no initial or exit fees. This compares to a managed fund which might charge 3% or more to cover the cost of a broker. Some funds will publish a 'tracking error', the difference between their return and that of their index.
Differnet funds will give a differnt weighting to shares in the index, another reason to choose your fund carefully. As carefully as you would, say, a mortgage? It's a good idea to stick with the better established larger funds. Remember thetarget is not to beat the index, but to perform better than holding property.
One word, inflation!
That comment sounded as daft as the 75 year old who claims, 'when I were a lad I went down t'pit for 26 hours a day for only a shilling!'
Thank you for sharing useful information.Does anyone know what HSBC/NAUTL means on a credit report? Can anyone share their opinion in it.
...and the dead shall rise from the earth...
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