# When is a margin not a margin



## command (25 Jul 2007)

Just read a report on the mortage market in the UK and assuming that the banks here are doing the same thing then it goes some way to explaining the super profits that they make. 

If I have a profit margin of €2 on goods I purchase for a tenner my margin then is 20%. If the cost of the goods goes up then my margin will tighten. If the price goes down then I will probably end up passing some of those savings on to my customers becuase my competitiors probably will and I need to stay competitive. 

When I borrow on my mortgage the bank quotes me a margin of say 1% above the base rate. 

If the base rate is 4% the the bank charges me 5%. The banks profit margin is 20% to 25%. However when interest rates fell to 2% the bank continued to charge me a margin of 1% which meant that their mark up became 50%. 

All of a sudden the bath that the AIB share price is taking makes absolute sense. Not only are the banks lending less but their margins are being severely affected by the huge drop in margins. 

After riding the irish borrowers for the last ten years the banks must be under pressure now. 

How would a normal business survive if their profit margins were cut in half?

They probably wouldn't unless of course their margins in the first place were so outrageously high that they were ripping us all off.  

As they say on Aertel, "Tell me something I don't know"

The shares must represent a sell for the moment then??


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## CCOVICH (25 Jul 2007)

Please note that discussion of individual shares is not allowed, so tread carefully on this topic.


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## KalEl (25 Jul 2007)

Equally though, in the example you're describing "turnover" for want of a better word is increasing and the margin in purely cash terms is staying the same. I don't think banks make most of their profits from tracker mortgages anyway-NIB for example are making virtually nothing from their LTV product, it's more of a carrot to lure you and sell you other products. It's an interesting question though.


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## command (25 Jul 2007)

Are the majority of borrowers not on a standard variable rate or some sort of a variable rate. In cash terms the banks might make the same but the purchase price of their stock (cash) has doubled so that their profitability is decreasing.  

Sorry about mentioning of AIB's share price. I was not being specific but using it as an example. Surely the increasing and decreasing of rates affect banks in the same way. The sell off of shres is affecting all financial stocks.


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## ang1170 (25 Jul 2007)

It's not a straightforward relationship in the way you describe, so they're not taking a 50% cut in margins.

See http://www.askaboutmoney.com/showthread.php?t=58835


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## HighFlier (25 Jul 2007)

Just to be picky, on your original post  if you buy for a tenner and sell for 12 your mark up is 20% but your margin is 2/12 which is 16.66%.

Markup is the profit as a percentage of cost. Margin is usually understood to be the profit as a percentage of the selling price. Pedantic Huh????


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## command (25 Jul 2007)

very pedantic but its not like you're wrong. My bad for not making more of an effort with my sums.


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## Sunny (25 Jul 2007)

command said:


> Sorry about mentioning of AIB's share price. I was not being specific but using it as an example. Surely the increasing and decreasing of rates affect banks in the same way. The sell off of shres is affecting all financial stocks.


 
The massive fall in financial stocks has nothing really to do with falling margins. Irish Banks margins have been falling for years with the introduction of more competition. The sell off on financial stock worldwide at the moment is due mainly to the sub-prime mortgage problems in the States and in the Irish banks case, concerns about the slowing property market here are exagerating the problem. But profitability and margins in Irish banks is still strong per se.


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## soy (26 Jul 2007)

command said:


> When I borrow on my mortgage the bank quotes me a margin of say 1% above the base rate.
> 
> If the base rate is 4% the the bank charges me 5%. The banks profit margin is 20% to 25%. However when interest rates fell to 2% the bank continued to charge me a margin of 1% which meant that their mark up became 50%.
> 
> How would a normal business survive if their profit margins were cut in half?



Profit Margin = profit (less expenses) / sales. 

Assuming a tracker, the banks gross profit is always 1% of the loan value. Sales is amount loaned. 
It does not matter whether the base rate (ECB) is 2% or 10% as the margin is always ECB+1%. The amount of profit on the loan will be the same in each case.

You are getting confused with profit as a percentage of ECB - which is of little importance


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## command (26 Jul 2007)

sorry about that, 

to start again, 

November 2001 
base rate 3.61%
SVR 4.25%
margin .65
percentage margin 18%

June 2003
base rate 2.09%
SVR 3.3%
margin 1.21
percentage margin 58%

December 2005
base rate2.24%
SVR 3.5%
margin 1.26
percentage margin 56%

June 07
base rate 4.09%
SVR 5.1%
margin 1.01
percentage margin 25%

I must be missing a point here but this to me looks like the banks cashed in during the boom of the last few years when they couldn't give money away quick enough and we couldn't take it off them quick enough to buy second houses and spend like crazy.  

Now that interest rates are going up and people are under more pressure and their bad debt risk increases the banks are pearing back margins. 

My sums are rough enough and I have taken the 1 week euribor rates at time when the interest rates went up and down and the banks passed on the rises or falls to the borrowers.


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