We recently we wrote that shareholders who took up the ANZ Bank’s [ASX: BEN] $14.40 per share offers were like ‘lambs to the slaughter.‘
Why on earth, we reasoned, would anyone want to invest more money in what is clearly an insolvent banking system?
As of yesterday the shares are trading at $19.29 and those shareholders that took part are sitting on almost a $5 per share profit. Not a bad little earner.
Naturally you could think we’re about to consume a table-full of humble pie. Not quite.
We don’t begrudge anyone locking in a 30% profit in the space of a month. You takes your risks and you’re either rewarded or it blows up in your face.
As long as you understand the risks of investing in the ponzi-style banking system then go for it.
Of course, ANZ Bank aren’t the only ones trying to raid the shareholder cupboard. Bendigo & Adelaide Bank [ASX: BEN] are at it as well now.
If you’re currently a Bendigo & Adelaide Bank shareholder you may be just as well off to ignore your editor’s advice and tuck in to buy some more of the stock at a discount. As I say, if you fancy a punt, why not.
Personally, we still wouldn’t touch any bank with a barge pole. Maybe we’re being stubborn, but in reality when you know the whole banking system is rotten is it worth risking?
Would we take an airline up on their offer of a free flight if we knew the engine on the plane could fall off at any moment? We don’t need to answer that one.
But really the whole raft of bank capital raisings just highlights what a sham the claim is about Australia’s banks being structurally sound. A ‘sound’ bank shouldn’t need to raise $300 million in capital from shareholders.
Most of these capital raisings claim it is to strengthen the bank’s capital position. They trot out the line that the Tier 1 capital ratio will now be X rather than W. Needless to say the banking analysts lap it up.
Already Swiss banks UBS and Credit Suisse have raised the target price for Bendigo & Adelaide. Purely, it would seem, on the back of the capital raising.
But right now there’s a bigger story than just the banks raising capital. What this capital raising proves is the inextricable link between the banking sector and the property market.
They cannot be separated.
If one goes, they both go.
The question remains why the banks feel the need to shore up their capital. As we mentioned above, we’ve been told ad nauseum that Australia’s banks are the strongest in the developed world.
Why on earth would they need more capital?
The answer is simple. Like a bear stocking up for winter, the banks are stocking up for the Property Winter of Discontent. You see, it’s like this…
Despite what the deflationists have argued, interest rates are on the rise. In the space of three short months the yield on a one-year government bond has risen from 3% to 4%. Longer bonds, such as the five-year have risen from 4.38% to 5.57%.
The chart below paints the picture:
Is it any wonder that Commonwealth Bank have upped their fixed rate mortgages again?
Do the banks want to raise rates? Probably not. Not when they know the fragile state that many of their borrowers will be in once rates really start rising.
The fact is they’ve got to. With all the debt floating around on the market, and more to come, the competition for debt issues will be even fiercer this time next year.
Banks will have to offer higher levels of interest in order to attract funds. That will have to filter through to their borrowers. There’s no question about that.
The ability to move on interest rates has been helped by their little PR coup on bank fees. It’s much easier for them to take a small hit in the pocket now on fees knowing full well they’ll have an easy excuse to increase interest rates regardless of what the Reserve Bank of Australia (RBA) does.
Even until recently the economists at the major banks were still singing from the same hymn sheet – “interest rates will fall further.” Most of them were calling for a drop to 2% as they told us not to worry about inflation.
All the while the banks were helping to fuel the hot air keeping the property bubble in the air. They’ve succeeded in suckering in hundreds of thousands of property buyers on the back of artificially low interest rates from the RBA.
Extraordinarily, not a single one of the expert economists at the banks have considered this to be a problem. How could they possibly ignore it?
After all, the low interest rates and government cash bribes have given the property sector a three-in-one boost. A boost that can only result in a bubble.
This triumvirate consists of: people who would have bought into the market now anyway, those that have been delaying a purchase, and those that have brought forward a purchase.
The simple laws of supply and demand tell you that if you’re grouping together every potential purchaser from the last five years, today, and the next five years, it has to have an impact on prices.
When demand rises, prices rise. We’re not talking a complex scientific formula here.
But still the mainstream media largely ignores it.
The big problem for the banks and the property sector could come as early as next year. With interest rates even 1% higher than today, and no government bribes there will undoubtedly be fewer buyers in the market.
That will be bad news for the banks, especially if home repossessions continue to rise. Don’t forget, even in this ultra-low interest rate environment, home repossessions in Victoria at running at over sixty per week.
Think about what it’ll be when rates push higher and the cost of servicing loans also increases.
All we can say is that it’s a good job the banks are stocking up the cupboards now. We may soon find out whether they’ve kept enough in reserve to last through the Property Winter of Discontent or not.
Other Stuff on the Markets
The S&P/ASX200 edged up 0.11% yesterday, while overnight on Wall Street the Dow Jones Industrial Average slipped 32 points. In Europe the FTSE100 dropped 0.20% and the CAC40 lost 0.47%.
The price of gold in Australian dollars is trading at $1,130.69, while in US Dollars it is trading at $945.82.
The Aussie dollar remained steady versus the US dollar and Japanese Yen, trading at USD$0.8377, and JPY81.27.
Crude oil closed overnight at USD$70.65.
For the biggest movers on the market yesterday click here…
{ 3 comments… read them below or add one }
Nice article
“and no government bribes” I think it will go back to the original first home owner grant.
Also if the RBA raises interest rates then the banks will earn less or raise rates which will hinder growth of housing market and banks.
Would this cause people to stop buying government bonds and move into bank account to gain better rates on cash?(no good for government dept)
Are banks still borrowing off the RBA (print money) to lend out to make a better profit and to keep credit liquid?
It is hard to see rates go up for a while until the government can tap into other revenue to pay back dept.
Looks like the government are growing (interfering) with all business.
It reminds me of the movie the matrix revolutions where Hugo weaving’s character keeps multiplying (government interfering) and canot be stopped
yeeeeeeeeehhhhhhhaaaaaaaa WHAT A WONDERFUL WORLD
Great article, Kris. Gels with my own unschooled thoughts about the banking system here in Oz. Now I’m on to read “lambs to the slaughter”!