What an Absolute Banker

US tech stocks were on the nose during Friday’s US trading session. The NASDAQ led the falls, down nearly 1.3%. But problems in the tech sector pale in comparison to what’s in store for Aussie financial stock.

Jeez, what an absolute debacle. This Hayne royal commission is really uncovering some corkers.

But let’s be honest. The most surprising thing is that anyone is really surprised by the behaviour.

It’s really quite simple. When you are located close to the money source, as all banks are, the level and incidence of fraud and disgraceful behaviour increases.

Banks always have and always will attract the type of individual who wants to make a lot of money from being ‘a banker’. And while there are plenty of decent ones around, the truth is there are plenty of abhorrent individuals willing to fleece other people for their own benefit.

Things took a turn for the worse when the banks began to get into the wealth management game in the early 2000s. Money management and a distribution system (financial planning networks) designed to funnel money in-house, and increase funds under management/advice, saw the banks become a one-stop financial shop.

It was all about getting an increasing ‘share of wallet’, whether it was good for the client or not.

The biggest issue for the banks (and other financial players like AMP) is that this royal commission has shone the light on business models that are at risk of not continuing in their current form.

AMP is a case in point. The CEO has quit (I wonder how much loot he is running off with) and, in an ASX release on Friday, the company said that it ‘apologises unreservedly for the misconduct and failures in regulatory disclosures in the advice business.’

Only Sorry They Got Caught?

Did the apology come because AMP is genuinely sorry, or is it only sorry it got caught? Obviously it’s the latter. Without the royal commission to extract the truth, this daylight robbery would’ve continued unabated.

And that could well have happened if the government had gotten its way. There have been calls for a royal commission into financial services for years from Labor and the Greens. But the bank lobbyists clearly had the Libs in their — ahem — pocket, and it was only dissenting backbenchers that got the commission underway.

The question is, where does this leave the industry? Quite simply, in a very deep hole. But let’s try and put some meat around it. What does it mean for share prices? 

Broadly speaking, you should steer well clear of the industry, especially the banks. Although having said that, you should have been out of the sector for some time. My Crisis & Opportunity subscribers certainly are. The charts have been warning something was going on for a while.

Check out the chart of the ASX 200 Financials index, below:

Japan chip-making machine sales to China - Japan metal-working machine sales to CHina 27-03-18

Source: Optuma

[Click to open new window]

It peaked a year ago, and has been trending fitfully lower ever since. In March though, the index broke down through long term support. Was this the market realising the long term impact of the royal commission?

Possibly. And here is what it might be seeing…

The Marriage Between Banking and Wealth Management is Over

Firstly, it seems reasonably clear than the marriage between banking and wealth management is over. The Commonwealth Bank is already going down this path. It plans to spin off its Colonial First State funds management business in an IPO later this year.

Whether the bank will also look to jettison its other wealth management segments like financial planning and insurance, is yet to be determined. One thing is for sure though, this royal commission has inflicted considerable damage on bank affiliated financial planners. Even if the businesses remain ‘in-house’, they will carry some damage into the future.

All this is happening at a time when the traditional banking model is under pressure. Household debt in Australia is at record highs. That’s thanks to a secular boom in mortgage debt, which, in double entry accounting, means a secular boom in bank assets and earning power.

But this growth has slowed recently and will continue to slow unless the RBA cuts rates again.

Throw in the threat of fin-tech competitors (who will chip away at the banks’ fee hoard) and you can see why the market isn’t exactly keen on the sector right now.

Which is kind of annoying as it makes up more than 30% of the ASX 200. In other words, nearly a third of the index is in a bear market. How’s that low cost index fund going for you!

Look, as I’ve said a few times recently; this is a stock pickers market. Allocating funds based on index weight is lazy and dangerous.

It’s reasonably clear to see that bank returns on equity will decline in the years to come. That will continue to put pressure on bank share prices, especially given there is little reinvestment of profits, and therefore little compounding of growth.

This is definitely a sector you should continue to avoid. Tomorrow, I’ll show you why it’s not a good time to be a seller of funds management businesses, which makes the current predicament for banks even worse.


Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

Official websites and financial e-letters Greg writes for:

Money Morning Australia