High fantasy, higher profits

Modern thinking portrays the land of Narnia as a mythical place, a place vivid in the imagination of children, but not a real place manifest in scientific reasoning.

Modern thinking portrays the land of Narnia as a mythical place, a place vivid in the imagination of children, but not a real place manifest in scientific reasoning.

The Australian Bankers' Association will not hear a word of it. Narnia - with all its Naiads and Dryads, unicorns, centaurs and beavers that talk - truly exists.

We know this because the banks have their own parallel universe too, the world beyond the Reserve Bank wardrobe, a world with astonishing similarities to Narnia.

Those familiar with the classic children's fantasy The Lion, the Witch and the Wardrobe know that it is always wintertime in Narnia. In ABAland, dear readers, it is always wintertime too.

This is a land frozen in time, you see. Just as a thousand years in Narnia is but a few seconds in the real world, the four years which have elapsed since the global financial crisis are but a fraction of a second in ABAland.

This explains why we, here in what is commonly deemed to be the real world, believe that market volatility and wholesale funding costs have subsided since the crisis, while the good citizens of ABAland are still waking up to the fall of Lehman Brothers.

It is no wonder things are so tough. As foretold by the bards of big banking, this is a perpetual winterland across whose bleak and icy climes our Big Four kings and queens - Ian, Gail, Cam and Mikey - traverse, warring with the Wicked Witch of Wholesale Funding Costs while the chill winds of competition howl all about them.

Yes, their profits have happened to record highs year after year, even though loan growth has been listless, and even though their own costs of operation have risen. Yet the price at which they raise their money remains, they insist, onerous.

If all this is not incontrovertible evidence of a parallel world, surely ANZ chief Mike Smith did not take home $17 million last year.

Can you not feel the magic now? Close your eyes and conjure up a company whose revenue growth has slowed - and whose operating costs have risen - but whose profits have somehow managed to soar majestically like a winged horse above the distant ice-capped mountains.

Truly, this is the Magic of the Margins.

Lest your correspondent be accused of prejudice, and we have been under assault from the ABA this week, we will publish online on Monday the dialogue between ABA chief executive Steven Munchenberg and former central banker and Canberra University professor of banking and finance Milind Sathye.

In a news story on Monday, the professor argued the three main forms of bank funding - deposits, and long-term and short-term wholesale funding - had all fallen in cost. Bank margins had risen, he said.

The ABA contends the professor is wrong. So, those with a predilection for funding costs can check out the debate online.

For those less fascinated by spread compression in senior paper issuance relative to Libor-OIS benchmarks, we shall distil.

In short, it is magic.

You see, we cannot know the provenance of these runic disclosures trumpeted as proof of high funding costs - whether or not they arise from communication with Mr and Ms Beaver or Mr Tumnus the faun.

We only know that they are secret numbers hailing from beyond the RBA wardrobe, numbers to which only the bankers are privy.

The other affinity between these two worlds beyond the wardrobe is that, just as Santa Claus really exists in Narnia, Santa is also very much alive in ABAland.

And the Santa of the bankers is every bit as bounteous for Ian, Gail, Cam and Mikey as the Narnian Santa is to Peter, Susan, Edmund and Lucy.

The difference is that the Santa of ABAland is in fact Swanta. Yes, he is none other than Swanta Claus, more commonly known as Treasurer Wayne Swan but known to the bankers as the curmudgeonly though affectionate old Swanta.

Swanta you see, has merrily bestowed his enchanted children - not merely with a sovereign funding guarantee, at better rates even than the second tier banking children enjoy - but also with an evergreen deposits guarantee and, as unveiled this week, access to $380 billion of taxpayers' money at 40 basis points above the cash rate.

This is the piece de resistance, the clincher, Swanta's consummate gift just in case anything ever, ever goes wrong.

When UBS broke with the research pack the other day and confirmed the banks were in a "purple patch", they cited the dramatic fall in wholesale funding costs over the past year. Spreads have come in 100 points.

When it came to deposits though - the source for more than half of bank funding - they were a tad conservative, citing the "special" term deposit rate of 4.25 per cent as a benchmark for the cost of deposits.

But how many of us are receiving 4.25 per cent on deposits? About 10 per cent of deposits are zero-interest transaction accounts; free money.

Then there is the average online savings account yielding 3.05 per cent, the average term deposit at 3.55 per cent, and so on.

But all this fuss is only getting in the way of a damn fine yarn. As Albert Einstein said, "imagination is more important than knowledge". It is in this that we, and the banks, stand united, locked arm in arm on common ground.

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