Banks are Scared of their Ballooning Costs

That’s one way to try and avoid bankruptcy I suppose…

I’m talking about the sensational revelation from last week that Deutsche Bank (DB) could have Donald Trump’s secretive tax returns.

Rumours abound about what the documents might reveal.

Russian co-signatories on loan documents?

Nefarious business dealings?

Or even worse…

Low income.

The kind of numbers that show Donald Trump isn’t quite the businessman he tells you he is.

According to Business Insider Trump has quite the history with DB:

Trump received about $US2 billion in loans from Deutsche over roughly 30 years, with the president starting to borrow from Deutsche in the 1990s. The bank was reportedly one of the few on Wall Street willing to lend to Trump, as his casino bankruptcies signalled risk in lending money to his business endeavours.

The president’s relationship with Deutsche soured over the years, reaching a climax in 2008 when he sued the bank before a loan, he owed them came due. Trump blamed his inability to repay the loans on the bank, claiming Deutsche was among the institutions responsible for the financial crisis.

No love lost there. Which makes the timing of this reveal very interesting…

As you know, these long-lost returns have been the focus of attention since the 2016 election run-up.

So why bring up the fact you have them now?

As ever in this day and age, there’s more than a few theories…

Download now: Three ASX fintech stocks taking on the banks (and winning)

The conspiracy theory

It’s no secret Deutsche Bank is a bank in trouble.

Their share price is at all-time lows. Down to just US$7.25 from 2007 highs of US$159.

Ouch!

I’ve written about it many times before here in Money Morning.

Not because I am revelling in schadenfreude at the site of failing German banks. But because I see it as a warning sign for bank shareholders all around the world. Including here in Australia.

The canary in the coalmine, so to speak.

Sure, they’ve had some specific problems of their own making too. But by and large they’re struggling under the weight of issues most banks around the world are going to have to face.

Tech challengers, high cost bases, regulatory changes and low interest rates. Throw in a looming economic downturn and it could be the end for many legacy banks.

The conspiracy theory out there is that by revealing they have ‘something’ on Trump, the bank is looking to buy itself some sort of favour to help get them out of the mess they’re in.

A desperate ‘hail Mary’ to get out of trouble.

Though the more obvious answer is that they revealed it now because they were subpoenaed to by a US congressional committee.

Predictably Trump’s lawyers are on the case and trying to stop DB from handing them over.

Whatever the truth, the real story you should be following is the breakdown and break-up of the big banks.

If it is a desperate play, they’re not the only ones doing it.

You see, a big bank here in Australia just lost a court case. And the fact this even went to court reveals just how scared the banks are of their ballooning costs…

ANZ teller wins ‘test’ case…bank costs set to soar

Last week you might have read the story about Irene Guesdon, a 68-year-old teller at ANZ’s Hoppers Crossing branch in Melbourne’s west for 20 years.

Long story short, the bank tried to move her to a branch much further away from her home one.

Despite the fact she has arthritis in both hands whichs make it difficult to drive, and the new branch didn’t have the special coin counting equipment she needed because of her condition.

I don’t know about you, but the fact that a big bank is going to war with an employee of 20 years shows that they value their staff about as much as the Hayne Royal Commission showed they valued their customers.

Not much…

But the real story probably is that ANZ simply didn’t want to pay her out what would probably be pretty substantial redundancy costs.

So they tried to bleed her out instead, making her life uncomfortable, in the hope she’d quit (saving them the redundancy payment).

Sounds pretty awful doesn’t it?

But I’ve seen such things firsthand in my finance career, so it wouldn’t surprise me.

To be clear, I’m not bashing the banks for the sake of it here. I’m pointing out this story as it’s a microcosm of a problem all Australia’s big banks are facing.

High staff costs, high branch costs, legacy technology costs, everywhere they turn they’ll need to stump up more cash to fix long running problems that are only now coming to a rolling boil.

Dividends set to go?

It’s not personal, it’s business, as Don Corleone might say.

Irene Guesdon was simply a casualty of this environment and is probably why the bank felt they had to fight it. This one case might apply to many more.

Some think the coveted bank dividend is under pressure now.

From Reuters:

Aug 26 (Reuters) — Australia’s biggest banks are expected to cut dividend payments and tap bond markets for more funding to cope with tougher capital requirements as regulators look to safeguard the sector from future market volatility, according to analysts and bankers.

Now more than ever, bank shareholders need to start looking under the hood of the banking world. To understand what they hold and why.

Because change is coming fast…

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: Three Aussie tech plays outsmarting the ‘big four’ banks. Click here to find out more.


Ryan Dinse is an Editor at Money Morning. He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur. With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle. Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.  


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