This is not a trick question, but what is the primary purpose of a retail (AKA commercial) bank?
Assuming it’s not been nationalised, like RBS and other 2008 basket cases, presumably the main function of a bank is to make money for its owners, i.e. the shareholders. Sure, the corporate mission statement might waffle on about helping customers through the key milestones on their life journey, blah, blah, blah, but if they don’t increase the shareholder’s value, they’re dead.
Australian retail banks have performed this task very well over the years. CBA’s share price and dividend history is shown below as an example, the other 3 major banks are not dissimilar;
That the dividends barely missed a beat following the minor difficulties in the banking world in 2008 is amazing. Of course, this masks a slightly inconvenient fact that they were supported by an implicit government guarantee of a bail out should one be required, allowing investors to remain calm and not rush for the exit like in other jurisdictions.
Gifts rarely come without an expectation of a quid pro quo, however. In the Australian case, the banks are expected to “do the right thing” by the public, by which we mean, “help the government”.
On the way up, when values are increasing and there’s a wealth effect to the public, or at least those exposed to the upside of property ownership, these two purposes (shareholder value and public service) are reasonably well-aligned.
On the way down, as property values decrease and regular members of the public start to experience financial pressure, the two purposes diverge. If the government of the day would like the bank CEOs to show some forbearance to those in distress or even take a haircut on the margin between borrowing and lending costs, the bank shareholders are going to suffer.
What might this mean in the short to medium term?
There’s a few factors at play currently which may provide us with an indication of how the next year or two might play out.
- The Royal Commission in to the financial sector has unearthed some unpleasantness by most major institutions. There will be ramifications for the sector in terms of increased oversight and regulation.
- Macroprudential restrictions on lending has resulted in a cooling of the housing market with prices down around 10% from the 2017 peak and perhaps, conservatively, 1 in 10 owner occupier mortgages being in negative equity (more, according to some sources).
- A likely change of government in May and the possibility of the removal of some tax breaks for new owners of investment properties.
- Costs of borrowing from overseas sources (currently about 60% of mortgage funding) has increased and looks likely to continue to do so, albeit mildly, during 2019.
- A halving of the number of foreign (by which we mean Chinese) property investors buying in Australia since the peak in 2014.
Predictions are notoriously difficult, especially about the future, but this combination of factors suggest that the decline in values is unlikely to halt during the next 12 months.
Whichever flavour of government is in power, and let’s face it, there’s little difference between the two parties other than one group is more competent at being corrupt than the other, won’t really matter; neither of the major parties are going to enjoy governing during a -15% or perhaps -20% property crash.
The calls to “do something, do anything” are going to become deafening.
The professional economic troll, Stephen Koukoulas, and the “Chief Economist” of My Property Market (i.e. the only employee), Dr. Andrew Wilson, are already flooding social media with pathetic begging of the Reserve Bank to cut rates.
God only knows how many more vested interests will come out of the woodwork over the coming months.
Bill’s Opinion
Obviously, the government is going to call in the favours owed. At the very least, banks are going to have to take a hit on margins. The banking regulator, APRA, may find itself under political pressure to ease the responsible lending restrictions that have been put in place and then banks will be “encouraged” to open the spigots again. Friendly State Governments may be under pressure to reverse restrictions on overseas ownership.
None, some or all of this might “work”.
Regardless though, shareholders of the banks are going to take one in the chops.
There is a very apt saying that goes like this “the people were ruined but the banks were saved” I think in general that this type of priority will always apply no matter what eventuates, at least in our current environment.
I have had a shit time with my bank shares of late, I got in just before the new tax on them was announced, then the RC, I was warned to get out, but I didn’t. The reason for my apathy was more because I had another pot of money that I needed to invest and I was struggling to find somewhere to put it and I said well rather than create more money without a home, by selling my bank shares, I left it in the bank shares, I think I am nearly even now allowing for dividends, so yes, they have been a relatively poor investment over the time. So its been a shit ride of late for me as a shareholder and I hope that my “taking one in the chops” is now completed. I would have been better off putting it in the bank so to speak as opposed to owning the bank, even in this very low interest rate setting.
I think the worst is behind them now, it’s hard to see a rates drop and we are now at “full employment”. But if you knew for sure how rates would go, then you would have to be either the Guvnor himself or you would be sharing a cigar with Soros in some elite mens club somewhere in the northern hemisphere.
Yes houses prices have some more to drop. But in the long term its business as usual and the banks will have the best brains that money can buy feverishly devising legal ways around the regulations, which means that going long banks is and always will be as safe as houses.
Personally, and this is not advice, I think global banks shares are probably a reasonably safe haven. US stocks are likely to continue upwards for a year or so, Greek banks are a great buy.
Australian banks are simply structurally rubbish. I’ve worked in 3 of them, and several of their overseas equivalents as comparisons. I know what I’m talking about. Dunning Kruger doesn’t even come close as a descriptor.
However, uranium is where the clever money is.
My little play account is restricted mostly to Aussie shares, its my super and its not a SMSF either. I have been in and out of uranium and lithium and am still in gold all miners and few other minerals as well, its good fun getting in and out and nothing like doing it to see how much more you lose on the real thing than paper trading!
Both my CBA and ANZ bank holdings are still below what I bough in at but with dividend they are both running at break even, which is also a loss after inflation, never mind lost opportunity, its all about the journey when you are losing money.
My UK and Aussie pension funds are about to be merged and, frankly, I can’t wait. I need to get my wealth out of the Australian rupee ASAP and under the control of The Guru in London.
Why?
“Hi William, it’s October 2017 and I feel we need to move to 95% cash and 5% gold for a year or so”.
Full disclosure: I’m still pissed off about the 95%….
You keep reminding me I need to get my pommy pension sorted out, especially now that there is an air of pinkslipsim and I aint getting any younger.
Do us a favour and do a post on how to get yer basic human rights over from old blighty, and I will politely comment on it.
Oh and I take your back.
I’m sending mine the other way, so can’t help you.
Kaboomba!!!!!!!!!!!!!!!!!
Nice bounce for your shares!
I’ll write in detail on the Royal Commission later this week.
Yesterday was the day for our banks to drop their heads in shame, now that done lets get on with primimn the pumps.
What about Francesco De Ferrari the new CEO of AMP, what a living legend, his fat bonus deservedly fully trousered today, nice suit as well, Wwhat a man, what a man, what a man,
What a mighty good man
Gotta say it again now
What a man, what a man, what a man,
What a mighty good man
He’s a mighty mighty good man
I know a few people at AMP.
If I were you, I’d avail yourself of their lending but not their shares, unless you’re an inspired day trader.
They merely supply me with my finance, which is acceptable.
But on the other hand
Francesco De Ferrari for PM.