What Are Excessive Profits?I am referring here to the annual results recently released by the Royal Bank of Scotland. In their results they have posted a profit of £7 billion. This is the highest ever for a UK bank. Wow! Pretty hot huh? Especially in the economic climate that has been prevailing over the last few years. Ok. Honestly, I am amazed. It is a stellar performance. They deserve massive praise. If you are not too familiar with the UK banking sector, here is the brief overview... Previously, there were many banks and financial institutions. Consolidations in the sector caused the weak to be bought by the strong. The strong are now all powerful an have huge market share. You know them: Lloyds Bank (then add in the TSB and C&G) to make an enormous Lloyds TSB; Barclays Bank bought another large player, the Woolwich Building Society; Bank of Scotland and Halifax Building Society 'merged' to form another giant and lastly the NatWest Bank and Royal Bank of Scotland did 'a deal'. You know how these deals work, both sides are so big that nobody can be certain who bought who or whom is now in control. The management teams call it a marriage with great long term benefits. Then, as soon as the ink is dry on the contract, those very same management teams go to war with each other to secure the best jobs, biggest cars and salaries and most implausable stock options (but that is another story). Who said Machiavelli was dead? I guess it would be fair to say that the 'big banks' have the market sewn up pretty well. This, of course, is denied on all sides. There are actually very few 'independent' companies left in the marketplace. Standard Life (a life assurance mutual) and Nationwide Building Society (also a mutual - owned by members rather than shareholders) would really be the main two. If nothing else, I believe that the presence of these two giant independents will keep the other big boys in line. It will force the products and services of all these other corporate goliaths to be at least competitive. (So the next time you get to vote for a demutualisation, think about more than the pay out you will receive. Do it for me if nothing else!) Royal Bank of Scotland have been busy though. They have bought large insurers (Churchill and Direct Line) and made them very profitable. The spending spree has taken them abroad too, with purchases of smaller banks in America and making them profitable as well. They do lots of profitable business as banker to the legion of small businesses in the UK. So far, this all sounds very noble and upstanding. Business and profit, well done. Yet, the anouncement of these profits was greeted by the UK press as almost scandalous. Why? Well because British consumers are being ripped off of course. What else could it be? For those of you reading this around the world, you may be aware that many of my readers are based in Belgium. Did you know that banks in Belgium almost always charge an annual fee to run a current account? You pay to transfer money. Many still charge an annual fee to let you have a credit card. Correct! You still pay for your services here, not as in the UK where that is all free. Do you still so feel 'ripped off'? The UK press went on. They were suggesting a 'windfall tax' on 'excessive profits'. What is excessive? I have not checked, but I would guess that the value of Royal Bank of Scotland as a company is in the £30 billion plus bracket. If you owned it and were deploying all that each year in business, would you consider £7 billion in profit to be excessive? I doubt it. You'd be overjoyed that it did not make a loss! Do we charge Claudia Schiffer for being too beautiful? Or Thierry Henry for scoring too many goals? Or Denzel Washington for being too good an actor? No, we celebrate their talents, hard work and reward them. As it should be. So why (especially in the UK) do we berate a business that has made a decent profit? As an investor, even if only via a pension fund, you should be horrified at ideas like this. As a consumer, you should be even more horrified by ideas like this. Taxes get passed one way and one way only, that is to you and I. If a windfall tax were to be charged to the Royal Bank, who would pay for it? Initially the company would, or more precisely the shareholders (you and I through our pension funds and investments) and then more longer term, the consumers would pay via higher banking charges and lower rates to savers (you and I again more directly). Therefore, I simply ask this: the next time you hear about the idea of a corporate windfall tax (especially in 'rip off Britain') please give it a few moments thought and understand who will wind up paying in the end. (Since writing this, the Abbey, formerly Abbey National has announced a huge loss for the same tax year and their shares have dived. Obviously banking is risky after all. Who would have thought it? Windfall taxes have once again disappeared from the news agenda.) * This was published in March 2004 * To read more about related subjects, please also visit:
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