In this fortnights update we talk bank profits and politics, why they both matter to you and your wealth, and how banks are shrinking to greatness.
Bank profits and politics
Over the past year the government led royal commission into misconduct in banking and financial services has seen banks share price fall, profit plummet, reputation disintegrate and a scurry to shrink to core banking by selling off their financial advice divisions.
This has hurt everyone, in different ways and by different amounts.
Falling share prices affect us all. We all have a superannuation account, and those super funds almost always have one or more of the big 4 banks (CBA, ANZ, Westpac, NAB) in the, in your, portfolio.
This means that as the share price falls so does the value of your retirement money.
Whether you like it or not, you are indirectly an owner and stake holder with the big banks.
Profit is a key driver of the share price, and dividend payments from the big banks. The big banks always make big profits, but that might not be the case for the short term. This week Westpac announced its half year profit result was down 22%. That is a massive fall. But still the dollar value of that half year profit is $3.3 Billion.
In Westpac’s case the profit decline was largely due to compensation and restructuring costs bite. That is to say, the amount of money they need to repay customers for doing wrong by them is substantial, and they are trying to move things around internally to fix up the issues that led to the mess.
Other big banks are also still making profits but facing headwinds. ANZ and NAB recently released their half year profit results, at $3.5 and $2.9 Billion respectively.
The amount of profits the banks make determines the dividend payment they give to shareholders, which is you or your superfund. It is very likely that dividends from the banks will shrink, directly resulting in less income heading your way.
Labor estimates that $8 Billion of franking credits are going to be paid annually to people who paid no tax. People currently earning money that way not only face losing that income all together but face the income reducing regardless of the government in power. It is unlikely this change will materially affect the wider property market because the SMSF property buying spree is done and the average per capita change is relatively low.
Reputation is critically important for banks as people, and Australians especially, are distrusting of banks and like the bash banks in the papers or over a beer at the local pub.
I’ve talked before about how banks move the goal posts to their advantage and this will continue.
Bank profits are also very political.
This is for a few reasons. One is that financial stocks make up about 40% or so of our share market, which means they have extreme value to our economy and politicians who want to see the economy hum along. Another reason is that they are big political donors and lobbyists.
Continuing talking politics, as this is my last update before we head to the voting booths on May 18th I want to make a comment on the current political situation as it relates to the finance and property markets.
Firstly, whether or not you will vote for a major party or minor party is inconsequential insofar that property prices will continue to experience downward pressure for the remainder of 2019.
Depending on the new PM and government will determine how long the pressure remains and the pace of declines is the question, not whether it will continue.
The coalition has not made any sweeping comments on changes to the status quo on property so we can expect for property metrics (auction clearance rates, price declines, number of listings, new building approvals) to continue on the same weak trend line.
Conversely the Labor government has announced significant changes that will impact the property market, namely halving the capital gains tax relief amount and eliminating negative gearing.
Both of those things will fundamentally alter the incentives for investors, who own about half of all apartments in NSW, and so will alter their behaviour going forward which will ultimately be to not invest as much, which will put further downward pressure on property prices.
Not to mention reduce the attractiveness of property as investment for younger generations.
These proposed changes are a good thing for stocks as generally people either put money into property or the share market.
Secondly, the way the banks structure themselves will change, largely as a response to regulation and policies, but also market forces.
We have seen the banks sell off their financial advice arms. CBA sold off Colonial First State to Japanese financial conglomerate Mitsubishi UFJ & Banking Corporation for $4.1 Billion. ANZ sold its wealth management arm IOOF for $1 Billion. NAB tried to sell MLC but could not get a buyer in time before they imploded and lost both their CEO and Chairman after the Royal Commission. While Westpac has said it will exit wealth management as well.
All of these restructures are an admission of failure of vertical integration.
A few decades ago the dream of big bank CEO’s was for their banks to become a financial supermarket. Where a customer would walk in and buy everything they needed, from debit cards, to home loans, car loans and insurance.
The idea at the time was that they would sell and manufacture these products, like Coles or Woolworths does with their home brands, which would give them healthy profit margins and greater “share of wallet” of each customer.
This worked brilliantly and profitably for a long time but has ultimately failed (customers and shareholders) as that business model is unsustainable.
As the big banks shrink to core banking, new banks are rising up and technology companies like Apple enter the market, this is the start of decades long change which will see large banks effectively become financial utilities, while other platforms (neo/new banks, Apple) own the customer experience, which is what will matter in the future.