- Wednesday, 23 May 2012 15:36
Article Read: 929
To quote Peter Finch in the movie classic Network "I'm as mad as hell and I'm not going to take it any more!"
With renewed debate over the post GFC actions of lenders and valuers I think a bit of common sense and reality is required. Having been in the finance industry for just on 35 years I reckon I'm in as good a position as any to have formed a view and here it is.
Banks don't plot to keep property and business valuations low. They don't deliberately instruct valuers to cook reports and they don't take any delight in seeing a customer's property or business lose value. Are you listening ABC Four Corners and the national press more broadly?
Prior to the GFC values spiked, purchasers paid market records for assets and banks lent against those prevailing values. Post GFC values fell and some borrowers found themselves over-geared with bank loans at times higher than the value of the security on offer. The lender, quite rightly, can't simply ignore this situation so revaluations occur. If the new valuation reveals a material fall in security value and a commensurate rise in gearing to high risk levels the lender has an obligation to all its clients, shareholders and the community more broadly to do something about it.
I hear stories all the time about borrowers being placed under pressure by a lender who's had a revaluation done and the theory is always the same. The bank is responsible for the situation because they got the new valuation done. What rubbish! The market adjusted post GFC and the lenders valuations followed accordingly.
The tail is not wagging the dog here and anyway the idea of a lender wanting to see security values fall is clearly ridiculous. Does this mean valuers always get it right? The simple answer is [it] depends who you ask. I've seen very few valuation reports in my career that were demonstrably flawed and in each case it's been the result of a valuer inexperienced in valuing a particular asset class having a crack at a report.
Saw one quite recently on the Sunshine Coast but these are very much the exception to the rule.
The challenge for the lenders lies not in revaluations but in the strategy employed once it becomes clear that a client is over geared and the value of the security is going south.
Frankly, the balance between doing the right thing by the client and the bank is a very fine line indeed. The economic factors that drive down security values generally have the same effect on cash flow so asking a borrower to pay lump sum debt reductions or accelerate P and I repayments are not usually viable options. Taking additional security can be a way out but more often than not there's little equity in other assets to support the situation. In my experience at this point one of two things will happen.
The lender will decide that the underlying business and assets have viable long term prospects and will hold their nerve or things are clearly not going to recover so best to confront the awful truth. Again, this is a very fine line and frankly I suspect there are few bankers who have the skills to walk that line while respecting the dignity of their clients. Get the respect and dignity bit wrong and sooner or later, if you are a lender, you'll end up on national TV for all the wrong reasons and that's a shame because here's the thing.
For every borrower who makes a noise about being screwed by the banks there's many more who have been supported and survived the GFC because of, not in spite of, their bank. And make no mistake, ask the majority of bank clients if they would like their bank to have higher bad debt provisions and pass the cost on to them and we all know the answer to that question. It's kind of like my theory about certain government aid and welfare payments. Ask the average voter if they agree with the politically correct government support programs and you'll get a positive response most times. Ask the same tax payer to nominate voluntarily and confidentially on their tax return which schemes they'd like to pay extra to support and I suspect you'd see a very different response.
At this point in my rant I'm going to give the banks a bit of advice so here we go. When the geniuses in Canberra decided we needed a mining tax in order to knobble the one industry that is thriving post GFC, the miners took Peter Finch's advice and got mad as hell. They took out full page ads in national newspapers and prime time TV spots to put their case and to ensure the general public had both sides of the story.
So, with bank bashing at fever pitch where are the banks? Doing what they do best which is making an absolute botch of explaining to their clients and the public more broadly exactly how they operate, the nature of risk and the cost of capital. I'm not talking about articles in the Financial Review or highly complicated theoretical discussions. I'm talking about clear, simple and concise communication and engagement with the business community and general public. No more motherhood statements, no more we're all in this together advertising campaigns, just some dose of reality, cut to the chase information.
So come on banks, get out there, take some full page ads and generate a bit of positive debate for a change! And for God's sake, don't talk in economics and bank speak, our treasurer needs to understand you as well.
Hmmmm. I feel better already. Darling, my medication please.
Mike Phipps Finance