IMF targets bankers’ FAT

Banks ROE Apr10.pngWe are often told that investment bankers are much cleverer than the rest of us. But sometimes, they do seem to lack common sense.

Their behaviour since the Crisis, in paying out $bns in bonuses to the lucky few, seems no way to appease understandable public anger over the cost of the banks’ bailout. The International Money Fund (IMF) today calculates this cost at a staggering $862bn, c1.5% of global GDP.

Thus they shouldn’t be too surprised that the IMF is today proposing two new taxes. One is aimed at financing any future bailouts, whilst the other is a more general Financial Activities Tax, or FAT. And when the IMF bothers to think up an acronym like this, you know it means business.

Equally, chemical companies should also be concerned at the way bank profits routinely tower above theirs. As the above Financial Times chart shows, UK banks Return on Equity (the purest measure of profitability), has been consistently over 20% in recent years. Other Western banks have been similarly profitable. By comparison, BASF’s ROE between 2000-9 averaged 16%.

The easiest way to start restoring the balance might be a more cautious response when taking investment bankers’ calls re prospective M&A targets. This activity accounts for a high proportion of banks’ profits, yet all the evidence suggests that most M&A destroys value for the acquirer.

Being smarter at M&A, and only doing higher quality deals, might therefore be an excellent way to boost companies’ ROE whilst reducing that of the banks.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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