Jump to content

The Banks


Does It Get Any Better For The Big Four?  

218 members have voted

You do not have permission to vote in this poll, or see the poll results. Please sign in or register to vote in this poll.

Recommended Posts

Foreign investors are also skeptical of the scale of Australian banks. All four now sit in the top 15 globally by market capitalisation, beefed up by record banking profits, their attractive yields, and higher interest rates relative to Europe, Japan and the US. "The basis of their thesis is that four banks from a small backwater in the financial world have little business being amongst the largest in the world,"

it seems it is the (perfidious) foreigners, the (inherently evil) hedge funds, putting a bit of pressure on local banks. << and incidentally, world's most profitable bank is Wells Fargo, with $25bill last year; it was described as a 'retail bank making 400bips on consumer credit (of all kinds). Sounds a bit like our Big 4 >> but are they playing a short term game, only. Because the comparisons between their OS structures and local banks don't really stack up


Yes, local banks are really big building societies, they are not investment banks like the US and European ones ... that seem to get into trouble. Latest is Deutsche Bank triggering much of the recent panic ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ its share price more than halved in the past year as it struggles to generate adequate returns. Forced to suspend its dividend, this month it even sought to reassure investors it could pay its debts (the CoCo conundrum).



- profit growth is slowing, but recent performance is not cause for alarm. CBA, NAB and ANZ all posted solid, if unspectacular, profit growth in the recent round of earnings updates. Westpac does not report its profits until May.


- there were some rises in charges for bad loans ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ especially at ANZ ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ but not by enough to get the market especially worried. NAB even had its lowest quarterly loan loss since the global financial crisis ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ though this was probably a one-off.


- there is also a question mark over bank dividends. Some analysts are wary about dividend cuts at NAB or ANZ, which make lower returns than Westpac and CBA. but then, grossed-up dividend yields are more than 10 per cent, incl. benefits of franking credits.


- credit markets that banks depend on are not freezing up like they did in 2008.


- Complex financial markets that allow investors to bet on the odds of a bank going bust have recently shown signs of stress, which could push up banks' funding costs. These tremors are nowhere near as severe as what happened in the euro zone crisis, let alone the GFC.


- Australian banks are less reliant on volatile overseas markets for funding these days. Deposits, a much more stable source of funding, now make up about 60 per cent of bank funding, compared with 40 per cent before the global financial crisis. There is a graph in RBA Chart Pack showing this quite clearly Funding Composition of Banks in Australia http://www.rba.gov.au/chart-pack/banking-indicators.html


- there is an overdependence on housing (margins margins margins), unemployment data could be the 'canary' that triggers increase in bad debts, funding costs are rising (Perls III was 1.05% over margin, its replacement Perls VIII is 5.20%), etc, but at present, expect minimal growth in dividends ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ possibly even some cuts. The economy would have to become a whole lot weaker for the banks to get into serious strife.

Link to comment
Share on other sites

  • Replies 184
  • Created
  • Last Reply

Top Posters In This Topic

Top Posters In This Topic

Posted Images

thanks eb,

Just talking to an astute (GFC dodging) investor friend, and he has come to that decision (on a risk adjusted return basis) that NAB has better prospects and less messiness/ definitely less capacity to surprise in a nasty way, despite ANZ oversold status.

Link to comment
Share on other sites

  • 4 weeks later...

The value of the major banks fell by almost $25 billion in two brutal days on the sharemarket because investors are worried credit losses will accelerate and hurt profits.


The four major banks fell between 2.4 per cent and 3.4 per cent on Tuesday, following Thursday's revelations by ANZ Banking Group and Westpac Banking Corp that soured corporate and consumer loans would force them to increase bad debt provisions.


ANZ's news that bad debts will rise by $100 million cut its market value by $6 billion. ANZ shares are down 10 per cent from their recent high over the past five trading days, putting them into a correction. The other major banks are not far behind, falling between 9.4 per cent and 6.2 per cent over the same period.



Watermark Funds Management financials analyst Omkar Joshi​ said ANZ's third increase in bad debt provisions in seven months suggested either the bank had not been conservative enough planning for bad loans or isn't on top of its corporate loans. He said "second order" effects from the resources slump could hit the banks, such as loans to businesses that provide services in regions where the primary industry is mining or corporate loans for infrastructure. Commonwealth Bank could be hit, given its big business in Western Australia as a result of its BankWest acquisition, he said.

Link to comment
Share on other sites

The Australian equity market reversal was driven largely by weakness in the banking sector, as ANZ's (ANZ) decision to increase provision for bad debts. The announcement caught the market on the hop, given that it has only been five weeks since ANZ outlined provisions at their quarterly trading update. Then, provisions were set at $800m, largely driven by Asian ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ and particularly Indonesian ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ loans. On Thursday this was increased to $900m, the addition being justified by exposure to specific companies such as Peabody Energy (coal) and Arrium (iron ore/steel). Investors punished ANZ, which fell -5.2%, despite the effect on earnings probably being in the order of 1-2%.


There are several key issues to assess. The first is whether the need to increase provisions will affect all the banks, or just ANZ. Westpac (WBC) seems to have quickly answered that question, announcing that they, too, are likely to increase provisions based on exposure to several specific companies. All four major banks have exposure to Peabody Energy, which has missed an interest payment and may need to file for bankruptcy in the US. The surprising element, at least in ANZ's case, in the possible prior underestimation of provisions required, given that the issues at both Peabody and Arrium have been well flagged. We believe that all four major banks are likely to raise provisions and relative movements in their stock prices should be viewed within this context.


The second question; are possible insolvencies confined to resources or is there a possibility of weakness in the retail and commercial sectors that could further undermine banking loan books? If issues are confined to resources, then there is a chance that Thursday's price action may at least partially reverse in the near term. For example, high yield resource-related credit spreads have narrowed in the fixed income space, party driven by an improvement in commodity prices. It is important to understand that there are likely to be more resource companies under extreme pressure, despite the recent bounce in commodity prices, given the high levels of debt throughout the sector. That said, and notwithstanding the very specific issues which have undermined Dick Smith (DSH) and Slater and Gordon (SGH), there are at this point few signs of any endemic weakness that could lead to widespread defaults in the broader economy. ANZ were quick to point out that they did not have any exposure to DSH or SGH.


We also need to consider how banks might look to counter the hit to earnings from greater provisions. We think it is likely that banks will scale back their aggressive competition and discounting in new mortgages. There is also a strong chance that they will increase rates on their mortgage back book, in order to defend margins and payout ratios.


At this point, ANZ has been the hardest punished, with WBC, National Australia Bank (NAB) and Commonwealth Bank (CBA) falling -4.6%, -3.5% and -2.5% respectively on ANZ's news. The regional banks were also hit, with Bank of Queensland (BOQ) falling -5.2%, despite a lack of this institutional exposure. This probably reflects a "flight to safety" towards CBA, which is often perceived as the highest quality company in the sector.


The sector as a whole has de-rated over the last 12 months is at its largest P/E discount to Industrials since 1997. There is a strong valuation argument in its favour ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ and particularly in the case of ANZ, which is at an extreme discount to CBA ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ as long as you take the view that the Australian economy is not headed for recession. That said, in addition to softening house price growth and pressure on resource companies, there is a possibility that the Basel Committee may limit use of in-house capital models, also adding to the pressure to increase provisions. As a result the sector is likely to face a persistent headwind of negative news-flow in coming months, which may constrain the possibility of a significant near-term re-rating.

from BT


presume BT is referring to the next "wall of worry": Beware 2018, when the next perfect banking storm may hit

Those looking for when the next financial crisis might be should set a reminder for January 1, 2018.


That's when a host of new rules are scheduled to come into force that are likely to further constrain lending ability and prompt banks to only advance money to the best borrowers, which could accelerate bankruptcies worldwide. As with any financial regulation, however, the effects will start to be felt sooner than the implementation date.


Two key rules are slated for 2018: The leverage ratio set by the Basel Committee on Banking Supervision and International Financial Reporting Standard No. 9, defined by the International Accounting Standards Board. Other rules that require banks to stop using their own internal measures to assess risk start to be introduced from next year.


Basel III has already been blamed for reduced liquidity in global markets and slower credit growth. What's about to be rolled out will be a steroid shot to that.


IFRS 9, for instance, will require earlier recognition of expected credit losses, a move that according to some credit analysts could increase nonperforming assets at some banks by as much as a third. As bad loans -- or their recognition, for that matter -- increase, so do capital requirements. In other words, it'll be more expensive and difficult for banks to lend.


New Basel rules aimed at reducing the leeway banks currently enjoy on how they account for risk will come into effect over the next two years. The regulations imposed after the global financial crisis already require banks to set aside more capital for every dollar they lend, depending on a borrower's credit standing. The trouble is, global regulators left the decision on creditworthiness mostly to the banks themselves. A 2013 Basel study found variations of as much as 20 per cent in the risk weighting attached to similar assets.


Starting from 2017 therefore, financial institutions will no longer be able to use their internal models to assess risk for derivative counterparties. In 2018, that will be expanded to securitisation and thereafter -- though the exact date is yet to be determined -- lenders will have to evaluate all of their loan clients based on standards set by the Basel committee.


According to the proposed rules, companies that have higher revenues and lower leverage will require less capital from banks, meaning banks will have an incentive to lend only to the biggest corporates with more established businesses. Good luck to smaller enterprises needing funds to increase sales.


Before that rule comes into force, however, the leverage ratio takes effect on January 1, 2018. From then, banks will be required to limit how much debt they have overall on their balance sheet, effectively putting a hard cap on loan growth.


It's increasingly difficult for banks to help spur global expansion, no matter how low -- or negative -- benchmark rates are. But it's about to get a lot tougher. Banks will tighten their belts and as they reduce debt levels, so will the world. That means more bankruptcies, lay-offs and fewer jobs, which sounds very much like a recipe for a global crisis.


As former Bank of England Governor Mervyn King noted recently, the massively detailed banking legislation that was enacted after the last financial crisis has certainly created a lot of jobs for lawyers and compliance officers. Perhaps those two areas will be the only bright spots post 2018.

Link to comment
Share on other sites

I'm starting to wonder if my money would be better employed elsewhere than Westpac.

I have the advantage of having bought at the low during the GFC so its div return is good.

But if there's to be no more cap growth?

The question is, would I find the same yield (on cost, not market value) & security + cap growth in another sector.

Decisions Decisions!

Link to comment
Share on other sites

You may want to think about organising your portfolio along these lines?

The "barbell" approach is an investing strategy that looks like a barbell, heavily weighted at both ends and with nothing in between.


The barbell strategy is used with reference to stock portfolios and asset allocation, with half (some) of the portfolio anchored in defensive, low-beta sectors or assets, and the other half (rest) in aggressive, high-beta sectors or assets.

Link to comment
Share on other sites

I think if you stuck another weight in the middle to cover semi-defensive/semi-aggressive stocks, that's probably something like I've got now. But the banks? I think they can maybe hold you back at this point.

What to replace them with, there's the question.

Link to comment
Share on other sites

it is hard to sell The Big 4, especially if acquired earlier on and in own name (CGT implications). I have taken the approach, probably similar to your thinking that, if sold, what is going to replace that 5-6% yield - and that is on current pricings?


Despite the "professionals" always moaning about individuals and SMSFs too heavily exposed to Top 20 stocks, anecdotally I haven't heard of too many doubling up (down) and buying more of these stocks ..... but, again, as long-term holders there may be some reluctance to sell.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

  • Create New...