Student: Bank of America and Cash Earnings Essay

Submitted By happycloud
Words: 1034
Pages: 5
Open Document
9/24/12

Bank’s ‘manipulate’ cash earnings

Bank’s ‘manipulate’ cash earnings
PUBLISHED: 20 Sep 2012 PRINT EDITION: 20 Sep 2012 John Kehoe Banks are under pressure over remuneration policies which allow bankers to boost their pay artificially and potentially fork out unsustainable dividends, investors and analysts argued. Frustrated senior fund managers said on Wednesday they had lobbied bank boards to overhaul the use of “cash” or “underlying” earnings when determining senior banker remuneration. The financial measurement allows profits to be massaged by stripping out negative one-off items and removing costs reported in statutory accounts. Cash profit, which was first devised by former Commonwealth Bank of Australia chief executive officer David Murray in 2000, can deviate by as much as 30 per cent from other profit measures. The heated debate over executive pay was extended to banks yesterday, following the publication of a report by analysts at Citigroup who called into serious question the use of cash earnings to determine remuneration and dividend payments. The report’s findings were backed by institutional investors who said the major banks used accounting techniques, such as booking restructuring costs and software expenses “below the line”, so they did not negatively impact on cash return on equity. Westpac Banking Corp, National Australia Bank and Australia and New Zealand Banking Group said last night their executive remuneration was not solely based on cash or underlying earnings and they used other metrics. “Cash earnings is one of several inputs we use in determining our dividend policy,” an NAB spokeswoman said. Citigroup analyst Craig Williams said cash profit had “serious deficiencies” and 17 per cent of cash profit never flowed into bank capital, a benchmark that determines shareholder wealth. “Much of the capital ‘leakage’ has been represented by managements’ so-called below-the-line items and mark-tomarket balance sheet movements which are not captured in cash profits,” Mr Williams said in a note. After accounting standard revisions in 2002, “the ‘cash profit’ metric became a creature of bank management’s own creativity. It is neither reliably measurable, nor is it auditable”. Capital leakage is defined as the part of cash profits which do not flow into common equity Tier 1 regulatory capital. Westpac and NAB’s remuneration policies are partly based on cash earnings. Citigroup said it was possible that CBA and ANZ did likewise. ANZ later confirmed “underling (its cash equivalent) earnings” were one of 20 metrics for short-term incentives. NAB has the poorest track record in “below the line” adjustments according to Citigroup, a result of its troubled past of business restructures and write-downs. NAB’s so-called RAP has been 30 per cent less than cash profit, the analysts calculate. “Accordingly, dividend payments have been set at unsustainable levels [NAB has paid out about 100 per cent of common equity Tier 1 generated in the past two-and-a-half years as dividends] and capital generation is most modest,” Mr Williams said. The head of one fund manager said yesterday cash earnings could be “manipulated” by management and it was a perennial problem for investors trying to validate how banks adjusted statutory earnings to cash earnings. “When you’re running a bank there are plenty of levers to pull to deliver a cash-earnings number,” he said. “The problem is choosing a better yardstick to measure performance objectively and that is not easy.” Citigroup said management should be remunerated on regulatory capital generation, best measured by so-called regulatory adjusted profit, to properly align interests with shareholders. Head of research at governance advisory group Ownership Matters, Martin Lawrence, said there were good reasons for deviating from statutory profit. “But companies have to be consistent and avoid the impression of earnings minus the bad stuff,” he said.
Show More

Related Documents: Student: Bank of America and Cash Earnings Essay

Essay on Visa: Credit Card and Visa

other risks to Visa’s core business. The card provider and transaction processing industry is more competitive than ever before, with major card providers scrambling to develop the most advantageous partnerships and outbid each other for business. Bank consolidation and the advent of collective bargaining for merchants have hurt Visa’s position at the negotiating table and it must now accept lower fees. Newly popular electronic payment processing companies currently exist as complements to Visa’s…

Words 6729 - Pages 27

Accounting Essay

companies in 50 countries which includes a facility located in Charleston SC. The process I used to select Bosch as the company to analyze was through a business relationship. I met Sandeep Abrol, the Vice President of Material Acquisitions, North America for Bosch more than two years ago while managing a local business. The Company Bosch was set-up in Stuttgart Germany in 1886 by Robert Bosch (1861 -1942), as a “workshop for precision mechanics and electrical engineering.” Since then, Bosch…

Words 4941 - Pages 20

Personal Finance Research Paper

Investment options such as cash management, fixed interest and bonds, shares, property and; diversified and specialized funds. And additional saving options such as an everyday savings account, sub account and everyday online savings account. There are some principles of the personal finance. Personal Cash Budget – A personal cash budget is a tool that is used to assist in managing finances in a responsible manner. They forecast expected income, expenses and anticipated cash position over a period…

Words 3271 - Pages 14

Essay on Air Arabia Final Report

Earnings/Share Mar. Jun. Sept. Dec. Year P/E Ratio 2011A 0.06 0.06 0.06 0.06 0.06 10.16 2012A 0.06 0.06 0.09 0.09 0.09 9.29 2013A 0.09 0.09 0.09 0.09 0.09 17.19 2014E 0.09 0.11 0.12 0.12 0.12 9.82 Air Arabia the first low cost carrier: Airarabia has the distinction of being the first low cost carrier of the MENA region. The company currently caters to 85 destination across MENA, Indian subcontinent, Central Asia and Europe, with its fleet of 32 owned and leased Airbus A320s. Arabia has followed…

Words 4419 - Pages 18

Builtrite - Auditing Essay

Purchases Cutoff Tests 41 Module VII - Search for Unrecorded Liabilities 46 Module VIII - Dallas Dollar Bank Reconciliation 48 Module IX- Analysis of Interbank Transfers 51 Module X - Analysis of Marketable Securities 53 Module XI - Plant Asset Additions and Disposals 57 Module XII - Estimated Liability for Product Warranty 61 Module XIII - Mortgage Note Payable and Note Payable to Bank Two 63 Module XIV - Working Trial…

Words 14419 - Pages 58

Measuring And Evaluating Financial Position And Performance

Business School ACCT1501 Accounting and Financial Management 1A Session 1 2015 Week 2 Measuring & Evaluating Financial Position & Performance Student Handout Lecturer: Dr. Youngdeok Lim School of Accounting UNSW Moodle: https://moodle.telt.unsw.edu.au/login/index.php Session 1, 2015 ACCT1501 WEEK 2: Measuring & Evaluating Financial Position & Performance 1. Introduction Every commercial entity engages in transactions with other parties. For example, Woolworths buys products from suppliers…

Words 4141 - Pages 17

I Want T Olearn About Essay

3. RATIO ANALYSIS Objectives: After reading this chapter, the students will be able to 1. Construct simple financial statements of a firm. 2. Use ratio analysis in the working capital management. 3 .1 Balance Sheet Model of a Firm Business firms require money to run their operations. This money, or capital, is provided by the investors. This is mutually beneficial to the firms and to the investors. The investors get a reasonable return on their investment, and the firms get the badly…

Words 6902 - Pages 28

Jackson Destruction of the Bank Essay

Erik Neri Student ID: 8257678 Word count:1834 RESEARCH QUESTION: Why was president Andrew Jackson opposed to the national bank, and why did he destroy it? The legitimacy of President Jackson’s reaction to the Bank War issue has been contradicted by many, but his reasoning was supported by fact and inevitably beneficial to the country. Jackson’s primary involvement with the Second Bank of the United States arose during the suggested governmental re-chartering of the institution. It was during…

Words 1987 - Pages 8

Essay on Selling Financial Services Precall Report

our regulatory system is claimed as one of the best stabilization and fairness. According to Hughes Anthony, one situation which has raises concerns is when the political interference of somewhere else impacts the international operations of Canadian banks and Canadian citizens, who must adapt to a new livings style in a passive manner [2] . Recently, CRM2 (Client Relationship Model 2) has been enacted as a new regulatory amendment supporting investors by providing greater disclosure of fees and performance…

Words 3958 - Pages 16

Essay on Wells Fargo

largest bank in the U.S. by assets and the largest bank by market capitalization. Wells Fargo is the second largest bank in deposits, home mortgage servicing, and debit cards. In 2011, Wells Fargo was the 23rd largest company in the United States. In 2007 it was the only bank in the United States to be rated AAA by S&P, though its rating has since been lowered to AA- in light of the financial crisis of 2007–2012. The firm's primary U.S. operating subsidiary is national bank Wells Fargo Bank, N.A.…

Words 3065 - Pages 13