02 August 2006

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Business Today

Putting profits before service

My mother received a 75 years plus card from HSBC and she was ever so delighted that the Global Bank is a caring bank. Her long hours to queue for cashing a pension cheque appeared to be a bygone experience. To her momentous disappointment…

Banks are having a bonanza because they are leveraging cheap saving deposits and riding on the crest of a thriving “plastic credit” lifestyle and burgeoning lending to the homes sector.
Financial services are also yielding a rich harvest. Current accounts are always going to bring home the bacon for banks - if they’re overdrawn they take interest, if they’re in credit they make interest by re-investing - but in the bigger financial picture, these are not the way banks make much of their money.
It comes as no surprise that HSBC posted a resounding Lm20.6m pre-tax profit for the first six months of the year, an increase of 11.3 per cent over the Lm18.5 million earned during the same period last year. Having paid Lm83m in 2001 for over 70% of the shares in what was locally termed as the privatisation deal of the century it has bequeathed the Hong Kong bank with a total asset value of Lm1,706 million.
It seems such a coincidence that last Sunday’s quote from the Bible recounted the miracle of the five loaves feeding over 5,000 mouths. Could our privatisation unit be so half-heartedly advised that it could not have negotiated a finer deal? Tragically, five years after privatisation the nation needs a similar miracle to wipe off its Lm1,300 million debts.
Still HSBC’s Midas touch stretches far and its accounts reveal total loans and advances to customers increased by six per cent. Specifically, the bank continued to see a significant increase in its market-leading mortgage business, with home loans and equity release loans increasing to Lm371 million. Bertu Mizzi, HSBC’s chairman proudly announced the good news to its shareholders at a time when most domestic manufacturers and tourism related businesses are in the doldrums with unemployment reaching the seven per cent mark.
But can we truly attribute this phenomenal growth by HSBC to the banks’ superlative management skills. The answer is not so clear. The plot thickens and observers cannot explain why the pillars of the economy are creaking under the weight of a slowdown while the financial sector is booming? Why is there no visible correlation?
This is all very hunky dory but just mull over the fact that the economy shrunk by 0.1 per cent in 2004 and exports dropped by 17 per cent in the first six months of 2005. The first quarter of 2006 saw an unexplained improvement of a 3.1% increase in GDP.
Perhaps, the answer lies on the efficiency factors and the hard sell by banks of secondary financial products. Banks also arbitrage the lower rate paid on savings with the higher rate earned on diversified foreign currency portfolios.
Certainly there is open competition among local banks and their services are closely scrutinised by the MFSA.
So one may ask are property developers the main contributors to the rich gravy train. Certainly the construction industry is at the moment ballooning under the quest of land speculators particularly now that the development zones have been extended.
Can this surge of confidence in the real estate business fuel an increased income in the coming years so coveted by banks? But homes can only be in popular demand if there are new buyers who are attracted by superlative mortgage facilities accompanied by better spending power. Evil tongues attribute another reason buttressing the mega speculative gains on property. The new projects may serve as a temporary camouflage for soaking up heaps of undeclared currency in circulation. But do banks encourage credit particularly in social housing and other luxury developments? The answer is given in an interesting study by Joseph Falzon, Wendy Zammit and Denis H. Camilleri who published an econometric exercise on property and mortgages in Malta.
In their study they remarked about the consistent and sustainable growth in property values during the past 40 years. It comes as no surprise that bank lending to developers comes to the forefront as a motor that sustained the property boom of the past years.
In their empirical study it was revealed that until 1988 the maximum bank loan was four times the husband’s salary plus Lm5,000. Later on in 1999, it increased to 3.5 times joint income whereas the repayment period was increased twice, in 1995 from 25 to 30 years, and in 2003 to 40 years.
The study also delves into the purchasing power of buyers. Purchasing power fluctuated around in the 1980s, dipped steadily between 1988 and 1998 then jumped up until 2001.
Paradoxically the phenomenon of sky-rocketing property prices in Malta is not due to a scarcity of houses. On the contrary, there is a surplus. Much has been said of late that the extension of outside development zones can only fuel speculation and lace the pockets of the titled property barons .A conservative estimate shows that 25 per cent of properties in Malta are vacant. There is a strong case for a discounted interest rate by banks for lending to first time buyers pursuant to their unrewarding corporate social responsibility.
Other than that one cannot honestly justify their ballooning profits particularly at a time when government is tightening the purse strings to meet the Euro convergence criteria. There’s nothing wrong with banks making money. The trouble is that all the banks seem preoccupied with making money by cutting the level of customer service.
Recently I went to a bank on a Saturday morning where three staff members were sitting around waiting to “give advice” on selling bonds or insurance products. But, if you wanted to cash a cheque or make a deposit, there was no counter service available. I have no problem with the banks making a profit - they are businesses not charities after all. What I object to is the way they stitch up the market place making it difficult and inconvenient to transfer between banks and even between different types of accounts, all charging the same and paying much the same.
Putting profits before service reminds me of a heartbreaking episode that recently happened to my family.
My mother received a 75 years plus card from HSBC and she was ever so delighted that the Global Bank is a caring bank. Her long hours to queue for cashing a pension cheque appeared to be a bygone experience.
To her momentous disappointment she was still told to queue up behind the long line of customers even after brandishing her shiny 75+ card and when protesting with the ‘customer service’ staff the answer was the bank cannot give preference to anyone. They advised my mother to learn the finer technology of an ATM machine or better still register under the online banking service.
This way, by not drawing all the pension the bank can still make partial use of money and perhaps added to all the other pensioners via ATM (which bear no interest ) they can then theoretically lend at 13.4% APR to the unwary credit card holder.
Without an active consumer society body nobody dare question if customers ought to stop being so complacent or should the onus be on the banks to be more competitive and reduce their charges?
Do banks offer a fair service at a fair price or are they operating a cartel? Since the privatisation of Mid Med Bank, the perception is that banks are primarily interested in harvesting profits for shareholders. Customers don’t come into it. The recent complaints about them are the same ones that have been doing the rounds for the past six years.
In this age of computers why does it still take five days for a cheque to clear? The behind-the-scenes time is irrelevant, but when you are paying in a cheque, the money should be deemed to reach your account (for purposes of avoiding going overdrawn) the moment that the cheque touches the cashier’s hand. But this does not happen even though in such a small island where handling of cheques is facilitated by the central system there is a lingering thought that banks like to hang on to your money for that extra day or two.
Paradoxically the bumper profits generated by banks have allowed them to promote a shopping mall offering diverse financial products. Many customers do not realise they might be buying their insurance, investing in bonds, using a payment system for foreign currency transfers or getting a loan, or a mortgage all through the same organisation. It is high time that banks start ploughing back part of their super profits to render a better service while assisting small businesses paddle their boat up the choppy waters of a sluggish economy.

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