It’s going to be exciting week next week for RBS and Lloyds Bank shareholders with both AGMs on Thursday in Scotland – we expect to issue a report on events. Indeed it’s going to be an exciting period ahead because the law suits by those investors in the RBS rights issue who have not yet settled, and an action over the takeover of HBOS by LloydsTSB, are both getting into court in the next few months. Having Fred Goodwin on the witness stand, as expected, will be particularly interesting.
But the really astonishing recent news to this writer was the revelation on Monday (1/5/2017) by the FT that bankers are recognising future profits on zero-interest credit card customers. Bankers who offer zero interest balance transfers recognise some of the revenue and profits from new such customers based on the expectation that the customer will remain a customer, and not fully pay of the debt, when the interest free period ends.
Now a lot of them might not, but surely it is imprudent to recognise the cost of such promotions as other than a marketing expense which is surely what they are? And recognising future profits in the current accounting period is definitely neither sound accounting nor prudent in my view.
Was this not what Rolls-Royce had been doing which they have had to back-track on? With a major impact on their bottom-line as profits were routinely being overstated (see previous blog post on that).
The level of credit card debt is currently of concern to the Bank of England, and they might bring in tighter regulation on such offers and the level of debt. Or the customers might suddenly realise that not paying off such very expensive debt was nonsensical, particularly as the ability to roll it over to another credit card company might disappear. So all those future bank profits on credit card lending they are recognising now, and paying bonuses to management on them, might vanish.
Virgin Money is one bank where it is suggested they could lose as much as 18% of their earnings if there was a move to “cash accounting” on such arrangements, i.e. profits can only be recognised when the cash arrives.
So there are two questions that investors in banks might wish to ask at this year’s AGMs: 1) Are you doing this and if so why are the directors following this imprudent accounting practice? and to their auditors: Why are you approving this imprudent practice and under what accounting principles?
I fear this may be yet another example where banks will face regulatory action, and have to write off some of their claimed profits. And will investors ever learn to trust the reported accounts of banks when this kind of sharp practice continues?