Battles Take A Toll

The golden days are over for the big four banks and heavily exposed investors need to carefully manage the new risks

- John Addis

There was a time when you couldn’t get an Australian investor to listen to an argument to reduce their holdings in the big banks. “They’ve been my best performers – there’s no way I’m selling”, “We love the dividends” and “I don’t want to pay the capital gains tax” were the superficially persuasive rebuttals.

Slowly, times are changing. Prompted by the Hayne royal commission and its revelations of the rotten, greedy, profit-at-all-costs culture inside the big banks, many investors are now questioning their default beliefs. Unfortunately, attitudes are not changing quickly enough.

After 20 years of generally rising bank share prices, there remain plenty of investors with anything from a quarter to a half of their portfolio wrapped up in the big banks. For a US or European investor, this level of exposure would be unthinkable. Here we take it for granted.

The Hayne recommendations might arguably cement this attitude. The material impact on the big four banks amounts to a few billion dollars in fines and remediation measures but not much else. Instead, wealth managers and mortgage brokers will carry the can.

That’s fortunate because the big banks are fighting a series of battles that will have a much greater bearing on their future profitability.

The first is structurally lower growth. Home loans have been the major driver of the big four banks’ sensational run of profit growth over the past few decades. Any slowdown in this area would have an outsized impact on profitability.

The latest quarterly results from NAB make the point. With margins on home loans shrinking and impairments rising, albeit off a low base, revenue fell 6% to $2.6 billion and cash earnings slumped 21% to $600 million. The result was a slashed dividend.