What a banking year! But wait: was it really that tough?

The big players in the German-speaking banking sector have reported record earnings for 2005. In Switzerland, Zurich Kantonalbank reported a profit of CHF 810m (+16.5%), Credit Suisse Group earned CHF 5.9bn (+3.8%), which could only be beat by the UBS group with a profit of CHF 9.8bn (+28%, which refers to earings from continuing operations, when taking into account the sale of the three private banks Ehinger & Armand von Ernst, Ferrier Lullin & Cie. SA and Banco di Lugano as well as GAM Holding AG to its group company Julius Baer, this rises to an incredible CHF 14.0bn). In Germany, Deutsche Bank reported earnings of EUR 6.4bn (+58%). Are those record numbers only due to better management performance?

Well, yes and no, I think. In my opinion, the record profits in 2005 have two main reasons:

1) Strong Performance of Financial Markets
When you take a closer look at the reported numbers, profits rose especially in those divisions which directly depend on the performance of the financial markets: trading (as long as you "ride the trend") and wealth management (the fees are mostly based on the value of a portfolio or a stock). As European stock markets have rallied last year, asset-based fees have as well.

2) A rise in overall M&A transaction activity
As the world economy has gained momentum due to Chinese and Indian growth as well as a respectable performance of European and US economies, overall M&A transaction activity has seen a sharp rise in 2005 (+80% in Germany as compared to 2004). As a consequence of the overall market state, M&A transactions have been valued higher again which naturally leads to higher fee revenues and higher profits (as bankers' compensations probably have not risen proportionally).

Of course there are also other factors which have driven revenues and profits depending on the individual situation (at Deutsche Bank for example, mass layoffs probably have had their effect on profitability), but for 2005 a significant share of the rise in profits can be attributed to the market condition - even if this is disechanting, there has not been any magic in the market nor in the management's ability...

Are thieves homines oeconomici?

Maybe this is due to the end of my finance exams last week, but at the moment there seem to be much more exciting things to tell than finance. One of those things is the book I currently read: "Utopia" by Thomas Morus. Although a classic, the book is still not too present in the mind of the typical 21st century citizen. (I must admit, I would not have had the idea of reading Utopia either if Peter Gross would not have mentioned and recommended it to us :-)). The first 50 pages have reveiled a story I thought worth commenting on:

In Antwerp Thomas Morus talks with his friend Petrus Aegidius and a man called Raphael Hythlodaeus, a sailor and scholar at the same time. Raphael tells them about a talk he had in Great Britain about fair punishment for thieves. His opponent praises the then common practice: hanging people for stealing something. Raphael makes his opponent think by the following argument: When a thief knows that he is going to be killed for stealing, he is likely to kill his victim, because this reduces the chance of being accused and hanged. If he only expected a milder punishment, he would probably be satisfied with the stolen goods and let his victim go.

I have never thought of this before, but I think Raphael's argument is very clear and straightforward: When criminals know that the punishment for killing someone is the same or nearly the same as for a less severe crime, they are likely to commit the worse crime just to reduce the risk of being brought to justice by their victim. I cannot help, but this sounds just like the reknown homo oeconomicus, whom we have admired since the first economics lecture, doesn't it?

I am sure there are more interesting things to come in "Utopia". I will let you know...