Why are the Banks’ Shares Rising after the Royal Commission’s Report?

Despite the smackdown Australian banks experienced yesterday with the release of Kenneth Hayne’s 954-page report from the Banking Royal Commission, the Big Four Australian banks are trading higher today.

At time of writing, National Australia Bank Ltd [ASX:NAB] is up 4.54%, Commonwealth Bank of Australia [ASX:CBA] is up 4.67%, and Australia and New Zealand Banking Group Ltd [ASX:ANZ] sitting the highest, at 7.00%, despite the report listing them as the culprits subject to further action.

Westpac Banking Corporation [ASX:WBC] remains the only major bank to not be listed for further action. Their share price has risen by 7.56%, at time of writing.

Even AMP Ltd [ASX:AMP], which lost more than half their market value since their misconduct was made public by the royal commission, saw their stock rise by 11.54%.

Granted, analysts have said that the recommendations were not as severe as one would have previously expected. In fact, many have called them disappointing. But these stock market gains have been incredibly surprising.

So why did the Big Four rise?

Before the report was released after market close yesterday, Westpac, NAB and ANZ shares jumped by more than 1%. The Commonwealth Bank rose by 0.8%.

Did investors expect the report’s conclusions to be even worse than they were, and are instead reacting positively now?

Or is it just a matter of that old market chestnut, ‘sell the rumour, buy the fact’? Simply that the anticipation of the report was worse than the reality?

Perhaps. Yesterday was the warm up, today they’re on the playing field. And they’ve only been pushing higher.

What’s next?

It’s difficult to say. To be honest, this is not the reaction many expected. But it seems fairly plausible that in the coming days and further weeks, as the banks deal with the recommendations they have handled, and some start to face possible criminal and civil prosecutions, their values will fluctuate.

Treasurer Josh Frydenberg, amid dodging questions on why the Coalition had avoided the investigation for so long, has promised that the government will take immediate action on all 76 recommendations and deliver trust back to the Australian community. He announced the government were putting a legislative framework in place which would provide the regulators with the power and resources to reprimand the perpetrators.

Whether this will have a devastating effect on the Big Four is unknown for the moment.

As Ben Udy from Capital Economics told the ABC, ‘The report did not recommend much that is likely to cause an upheaval for the finance industry’. So perhaps the Big Four will bounce back after clearing out the garbage. Or perhaps they won’t.

Just know, it’s nowhere near over.

Whether the banks will fully recover from their recent falls is something only time, as well as the government’s response to the report, will tell.


Ryan Clarkson-Ledward,
For Money Morning

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Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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