Perspective - Blog

Why some pictures are worth nothing at all

Charts can be a fantastic way of conveying financial information but, since not all will be clear, accurate and/or fair, investors do need to be careful about taking them at face value

04/06/2019

Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

Like pictures, financial charts can easily be worth 1,000 words – but only when they convey information in a clear, accurate and fair way. When financial charts fail to do that – which unfortunately happens more often than it should – the only way they will amount to 1,000 words (or, in this instance, 700 or so) is when articles such as this one warn investors to be very careful about taking them at face value.

 

Take the following chart, which purports to illustrate how monetary easing by the European Central Bank (ECB) has negatively affected the profitability of banks in the eurozone. We will draw a veil over its source – no doubt those who care could work that out – but, as we say, the motivation of this piece is not a desire to criticise but to enlighten.

 

 

The chart is based on data from the ECB’s quarterly Euro area bank lending survey, which sets out to offer a comprehensive picture of lending conditions across the continent. The data in question comes from the survey published at the start of 2019 and, as presented in the chart, suggests things are looking pretty bleak for the eurozone’s banks, with margins on mortgages and company and household loans all collapsing.

 

But is that really the case? The downward slope over the almost four years of the ‘x’ axis certainly looks pronounced but, as the ‘y’ axis shows, the three lines are actually only moving in a range of 20 basis points – between 2.9 and 3.1. That is an extraordinarily small range and indeed, in the case of the line relating to margins on household loans, barely even amounts to a change at all.

 

A second point to bear in mind here is the ‘y’ axis of the chart does not relate to margin levels themselves but the change in margin levels – so, effectively, anything above 3 represents an increase and anything below 3 a decrease. Despite what the chart purports to show, then, while margins may have ticked down very slightly towards the end of the period in question, they may well still be higher than they were at the start.

 

We would not go so far, here on The Value Perspective, to suggest that the creator of the chart is being deliberately misleading but we would argue that some effort has been made to make the raw data fit a particular narrative – in this instance, the aggressive anti-bank sentiment that holds sway across the developed world and which maintains the sector is no better off today than it was in the teeth of the financial crisis.

 

That suspicion of ours only grows if you trawl the original survey for the data on which the graph is based. To be honest, that is by no means a straightforward task but, if you look at the various questions that focus on changes to banks’ terms and conditions for new consumer credit and other lending, you will see one thing very clearly.

 

Each question has five possible answers – in effect, big positive change, small positive change, no change, small negative change and big negative change – and, almost without exception, the ‘no change’ column registers an answer rate in excess of 90%. And when nine out of 10 people in a survey reckon conditions have not changed, it does seem a bit of stretch to stick the word “declining” in the title of your chart.

 

Perhaps the most troubling aspect of all this comes down to that picture/words exchange rate we mentioned at the start. The concise nature of financial charts makes them perfect for a world that thrives on social media – indeed this one found its way to us via LinkedIn – but, if they are not clear, fair and/or accurate, they become further drops in the sea of misinformation that constantly sloshes around markets.

 

Confronted with a chart that chimes neatly with their take on their world – ‘Banks bad; stay clear’ – the great majority of investors are likely to have subconsciously filed away the message of declining margins and moved on. Digging deeper into the data, however, illustrates once more the dangers of taking information at face value and that there is no substitute for doing your own research.