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Why is the world picking on our banks?

Peter Switzer
30 March 2016

By Peter Switzer

The crazy world of finance has many questions but the one that’s really getting to me right now is: why is the world picking on our banks? And, more importantly, are the banks’ doubters wrong? Are they creating a buying opportunity for the long-term bank believers?

To these latter two questions, the answers are clear to me and they are yes and yes!

Over the past two days, our banks have been copping it and it has stopped our stock market marching higher. However, there was another issue yesterday and that was our rising dollar after the Fed boss, Janet Yellen, talked the greenback down by implying there wouldn’t be a US interest rate rise in April.

Along with a great ADP jobs number (that says 200,000 private sector positions were created in March, which makes the Friday jobs report look potentially positive with a capital ‘P’), it explains why the Dow Jones index was up again and is heading towards the 18,000-level. It’s all-time high was 18,351.36, which was an intra-day high, so the Yanks are really finding their mojo while we’re still looking for ours!

Part of our missing market mojo is this unfair set against our banks. Sure, we have good reason to hate our banks at times, if you want to think about some of the recent headlines and their levying of fees. I’ve always argued, however, that the best way to get even with our banks (and even to like them) is to become a shareholder!

On that front, they’re pretty OK. Our big four were in the top 10 safest banks in the world during the GFC and they have been great dividend deliverers.

Have a look at this chart of the CBA’s dividends versus a 10% government bond.

You can see that the dividend return has grown from just under 50cents to over $4 for your set outlay on CBA shares in 1992, while your great 10% bond return would have been the same 10% for 24 years! And by the way, the share price has gone from $9.35 to over $73 today but has been as high as $95.27 over the past 12 months! 

So what happened?

There’s been a list of woes and let me rate their scariness to assess the set against our banks. Here goes:

  • David Murray’s inquiry said they were too exposed to home loans and needed to get more capital in, which they’ve done and the share price fell — a curse on your David, who happens to be a very responsible friend of mine!
  • The idiots overseas think we’re too much in debt with our houses and a bust is coming. This has been fueled by another friend, Kingston University economics professor, Steve Keen, who has been wrongly predicting our housing collapse since the GFC. He did predict the troubles that led to the GFC stock market collapse and did receive international accolades for that work but his housing calls have been wrong. Maybe one day he’ll be partially right.
  • International hedge funds have been shorting our banks, believing the likes of Keen and that other Pommie economist who recently tried to create a Big Short story for our housing market, which suggested that dodgy home loans would cripple our banks. In fact, a recent Bloomberg column showed that even our riskiest low doc loans have arrears under 5% and these make up about 1.2% of our total residential home loan mortgage book!
  • In the US (where a lot of this bank and housing vulnerability misinformation comes from), they don’t understand that we pay back our home loans, not only because we have to but because we want to. As Charlie Aitken said on my TV show, over in the US, “they can drop off their keys to their mortgaged home and drive away in a Ferrari!” A few years back, a couple of economists came to Australia from the IMF in Washington and were hosted by a local company in the lending industry. These two ‘experts’ didn’t even know that we have recourse loan and not non-recourse loans, like they do over there. That explains why Yanks can easily walk away from their obligations.
  • I believe in the good sense and monitoring of APRA and the RBA of our banks.
  • Recently, the weakness of the mining sector has led to ‘experts’ telling us that our banks are over-exposed to miners to whom they’ve lent money but the average exposure is under 2%!
  • I believe in the future of the economy with our growth rates at 3%, while the US is struggling to grow at 1%; and
  • I recently had a cup of tea with David Murray after that UK economist scared the media into believing we had a Big Short problem here. I asked David if he was worried about our banks’ viability. He looked at me as if I was mad, in only the way David can look at you when he thinks you’re asking a dumb question!

All that said, if I thought we were heading for a recession and unemployment was going up to say 10%, then I would be worried about house prices and the banks’ share prices. I’d be in agreement with Keen and his Pommie mate (and even the hedge fund brats making life hard for our banks). However, in the absence of a scary, international development, I think the banks are great value for a long-term investor.

Aitken says a lot of this week’s action against the banks was caused by fund managers trying to make money ahead of the end of the quarter, when they have to do show-and-tell for their clients.

And ANZ raising its debt provision by a small $100 million and another anti-Oz bank story in Forbes hasn’t helped.

It doesn’t help that banks and other financial companies make up about 40% of our stock market index. When they cop it, so does our index.

When the banks and the Australian economy prove their doubters wrong, that’s when our All Ords will spike higher. I do worry about some external event derailing my optimistic story for bank stocks and the index generally but that goes with the patch of investing in stocks.

Despite their shortcomings, I’m a bank believer.

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