Is it Time to Sell the Banks?


It’s finally happening. They fought a protracted rear-guard action, but Australia’s big four banks have finally given in to political and public pressure for a royal commission.

I say the big four gave in, rather than the government, because it seems they made the decision. Australia and New Zealand Banking Group [ASX:ANZ], Commonwealth Bank of Australia [ASX:CBA], National Australia Bank Ltd. [ASX:NAB], and Westpac Banking Corp [ASX:WBC]. Not our supposed leaders.

Calls for an inquiry into misconduct in the banking industry have been coming for some time. Labor, the Greens, and even elements within the government — namely the Nationals and a handful of Liberal backbenchers — have pushed it. But up until this week, Malcom Turnbull has staunchly opposed it. He claimed it was unnecessary, and potentially damaging.

In that sense he was very closely echoing the words of the big four banks themselves.

With the big four making up such a large part of our stock market, they may have had a point. Of course, if there is something rotten at the heart of our financial industry, allowing it to fester will only make the eventual consequences worse. Consequences that could be devastating for all Australians.

The banks, bloated by real estate profits, have become a massive part of our economy. Aussie banking profits are the envy of the financial world. But if they’re built on an unstable foundation, the results could be disastrous.

We saw in the US in 2008 what happens when a real estate bubble, unscrupulous lending practices, and complex financial products come together.

The global financial crisis threatened the whole world. Largely because it began in the world’s most important economy. If Australia were to suffer a similar crash, arguably the rest of the world might not notice at all. But I hazard a guess that you and I would.

China may not be there with a convenient construction boom to save us again.

So the possible dangers of this royal commission are very real. But the possible dangers of not having one could be just as serious. If public confidence in the banks is shaken, that could be more damaging than the real potential for misconduct to be brought to light and punished.

That seems to have been the logic behind this week’s backflip from the big four. They came together to write Treasurer Scott Morrison this week, saying that it was ‘imperative’ for the government to act. That, ‘It is now in the national interest for the political uncertainty to end.

Whether the banks really are acting selflessly to end uncertainty and promote stability, we can’t know. Perhaps they simply see the writing on the wall, and would prefer an inquiry come from a friendly government then a possibly hostile future one. Or — and this is of course just the baseless speculation of a suspicious mind — perhaps they’ve finally had enough time to delete all their problematic emails. Tracks covered, now they’re ready.

Whatever their reasoning, when the banks said ‘jump’, our prime minister jumped. After months of fighting the opposition, and elements of his own government, Turnbull caved. Shortly after the banks’ letter arrived, Turnbull and Morrison made their announcement.

So, is this the end of the banks’ dominance in Australia? Are our favourite dividend-paying stocks in trouble? 

The market certainly seemed to think so Thursday. All four of the big banks opened on Thursday significantly lower than they had closed Wednesday afternoon.

But the falls didn’t last. All but CBA recovered Thursday and Friday. ANZ clawed back to roughly the same level as before. NAB and Westpac actually closed the week higher.

As your Money Morning editor Ryan Dinse wrote Friday, it’s possible that a royal commission could actually strengthen the big four. As long as nothing devastatingly incriminating comes out on any of them, the result could just be an increase in the red tape burden on the industry. That kind of burden tends to favour the larger, established players. And prevent smaller upstarts from forcing their way in.

There are plenty of upstarts who would like a piece of the pie. New forms of financial tech are on the rise. Peer to peer lending, cryptocurrencies and other blockchain tech mean newer, cheaper, and often better ways to do what they do. In that environment, anything that favours the incumbent would be a win for the big four.

That rise in fintech, cutting out middlemen and empowering individuals, could be the real threat to the banks. Far more than a reluctant inquiry from a government that doesn’t want to find any wrongdoing. Or another page in the ongoing argument about a real estate bubble.

To learn more about how new technology could revolutionise the financial industry — and the kinds of stocks that could benefit — check out Ryan Dinse’s latest research here.

This week in Money Morning

Those at the top of the financial system have an interest in preserving that system — obviously. This is why, Ryan argued on Monday, so many of the biggest financial institutions are attacking cryptocurrency.

Of course the financial elite don’t want to see an alternative to their system. It would undercut their wealth and power.

But despite the ceaseless calls that crypto is in a bubble and headed for a crash, good cryptos continue to rise. The big names like bitcoin and ethereum especially so. And the same groups who have been trying to stop it are now changing tactics. Read the details here.

As bitcoin surged past US$9,000 early this week, even the mainstream media had plenty of headlines on it. Bitcoin’s meteoric rise has forced them to sit up and take notice. But Ryan was dismayed to see how shallow much of the coverage has been. The media can see bitcoin now that it’s reached these heights, and can’t be ignored. But they’re missing much of the potential of cryptocurrencies, and blockchain technology. Much like they missed bitcoin in the early days, when some of the most phenomenal gains were made.

For Ryan’s take on the ‘hidden’ cryptocurrencies that he believes still have their greatest potential ahead of them, click here.

Part of the reason that bitcoin has been so successful is the way technology has changed how we buy and sell. A digital currency would have been unlikely and impractical a decade ago. It would have been impossible two decades ago. But today, online retail is gutting the bricks and mortar sector. ‘Tap and go’ payments with cards or smartphones become more common every day. An online-only currency suddenly seems possible. Even preferable, to many.

But the drive to digital has also had another effect. The decreasing use of physical cash could prove a threat to your control over your own wealth, and your autonomy. A fully digital system would hand central banks a level of power to manipulate currency and the economy that they’ve never held before.

The solution may be built into the problem. Cryptocurrencies, made possible by the rise of the digital economy, could be the best defence against digital currency manipulation. The bankers didn’t see this coming. Ryan has the details in Wednesday’s Money Morning.

On Thursday Ryan approached the cryptocurrency market from a different angle. There’s a frightening amount of ignorance in this debate. And not just on the side of the crypto detractors.

As Ryan explained, some of the people buying today are doing so for all the wrong reasons. The crypto market contains incredible potential. But also plenty of scams, get-rich quick schemes, and half-baked ideas. You have to be careful, understand what you’re speculating on, and most importantly never risk money you couldn’t afford to lose. For Ryan’s take on how to protect yourself in the world of crypto, check out Thursday’s article here.

As we discussed above, Ryan looked at the banking royal commission on Friday. He looked at how the banks could use a rise in red tape to protect and ‘fence off’ the industry against new competitors.

Whatever the result, the next 12 months ought to be interesting. Read Ryan’s take here. And find out more about those upstart competitors, and the phenomenal gains Ryan predicts for them, here.

Until next week,

Tyler Jefferson,
Editor, Money Weekend

Publisher’s Pick: Exponential Stock Investor. Think the recent boom in cryptocurrencies was breathtaking? Wait until you see the explosion in the technology behind cryptocurrencies in 2018. According to Ryan Dinse, it’s going to send the valuation levels of a clutch of unknown stocks soaring…In fact, these stock performances could match…or even OUTPACE…the very best technology stocks born in the 1960s and 1970s…[more]

Aussie Dollar to US Dollar: 0.7564

Gold: US$1,275.11 (AU$1,685.96) per troy ounce

Silver: US$16.43 (AU$21.73) per troy ounce

Bitcoin: US$9,766.30 (AU$12,915.93)

West Texas Intermediate Crude Oil: US$57.40 per barrel (AU$75.90)

ASX 200: 5,989.80

Tyler Jefferson joined Fat Tail Investment Research in 2012. With a background in publishing, he started out as part of the team working behind the scenes with your Editors to bring you Money Morning each day.

When he joined, Tyler was Fat Tail Investment Research’s 12th employee. Today that number has grown to over 50, as more and more readers turn to Money Morning as their source for independent financial analysis and ideas.

Today as Managing Editor, Tyler still edits the articles you read each day. Along with that, he occasionally contributes to Money Morning with his own irreverent take on the most interesting news and opportunities for you.

Money Morning Australia