Money

COMMENT: Why bank shares are not the panacea for investors

AUSTRALIAN and international investors have heavily bought the idea that our 'Big Four' banks have bullet proof balance sheets and, should a chink appear in their amour, there is always the national balance sheet to back them up. Further, that they so dominate the lending market in this country that their profits and dividends are equally resilient.

As an investment strategy, this has proved remarkably successful in recent years.

The Big Four banks' return on equity is currently in the high teens, with fully franked yields over 5%.

However, like all investment strategies, it requires a sober and ongoing review of the risks. So let's look at some of those risks.

The Big Four banks' shares, it seems, are being treated by many as an alternative to cash deposits.

This is evident from the flood of capital out of term deposits into bank shares in recent years, as investors (particularly retirees) chased yield as interest rates came down.

The problem is: shares are equity, not preferred debt capital, like deposits.

In short, banks are in the business of selling debt

 

Which means shareholders stand at the end of the queue, behind deposit-holders, creditors and employees, in the event of insolvency.

Many scoff at this suggestion on the basis that our banks are "too big to fail".

While that may be the case, another way of looking at this is to say that shareholders stand at the front of the queue in the event of losses.

Anyone around in the early 1990s will recall that bank profits are by no means assured.

Indeed, a number of banks were under such financial stress that they were forced to sell assets (loans) at fire-sale prices to sure up their balance sheets.

This history was front of mind when the Financial System Inquiry made recommendations regarding changes to bank capital requirements last year.

In short, banks are in the business of selling debt.

While the price of one of their most popular products, home loans, has fallen, there are many other products (e.g credit cards and personal finance) which have proved incredibly resilient.

More importantly, revenue is a function of price and volumes, and housing lending growth is nearing double digits while default rates remain low.

As we all know, to make profits, your inputs need to cost less than your outputs. Inputs for banks consist of a mix of equity and debt capital.

The latter comes from domestic deposits and bonds and borrowing from international capital markets, all of which have been very cheap recently thanks to post-GFC pump priming.

Not surprisingly, banks have relied heavily on debt for their rapidly increasing profit margins. What may surprise you is how much - over 40 times equity capital.

You don't need to be Warren Buffet to work out that if the property market, unemployment rates and/or offshore borrowing terms become less favourable, the Big Four banks profits may look less bullet-proof; with shareholders at the front of the queue to absorb losses.

As always, obtain professional advice to develop a diversified investment strategy that matches your financial goals and review it regularly.

* CAMPBELL KORFF is the principal of Yellow Brick Road Wealth Management, Northern Rivers.

Topics:  banks big four banks investment



WIN a fishing trip, $5000 BCF voucher and get free stuff

Want to catch one of these big fellas!? Get your name into our competition to win the ultimate fishing holiday!

WERE running a stack of reely incredible giveaways!

Three news subscriptions and a free paper for $3 - saywhat?!

No Caption

FORGET everything you thought you knew about a great deal.

What's fresh at your local farmers' market

Chillies should be available at your local farmers' market. PHOTO: KATE O'NEILL

Chillies, figs, finger limes, eggplants are ripe for the eating

Local Partners

High achievers honoured at Australia Day Awards

FIFTEEN new citizens to be welcomed and 27 exceptional citizens and groups honoured.


What's fresh at your local farmers' market

Chillies should be available at your local farmers' market. PHOTO: KATE O'NEILL

Chillies, figs, finger limes, eggplants are ripe for the eating

'More sick people will be jailed': Confusion over medical cannabis

There is ongoing confusion about the legalities surrounding medical cannabis.

Is it legal? Where can you get it? What are your rights?

This week's Northern Rivers markets list

CASINO: McAuliffe Park in Hickey St is the venue for the new markets.

Check out the new Casino Riverside Markets this weekend

Madonna hopes for election unity

Madonna hopes Donald Trump's election will "bring people together"

JK Rowling rules out Cursed Child trilogy

JK Rowling has ruled out a 'Cursed Child' movie trilogy

Buckley's chance in psychological thriller

James McAvoy and Betty Buckley in a scene from the movie Split.

Broadway veteran back on big screen with James McAvoy

Daniel MacPherson: acting’s a bit like channel surfing

Australian actor Daniel MacPherson in a scene from the American TV series APB.

THE Aussie export talks about making his mark in the US.

Shopping isn't fun if you can see dead people

Lisa Marie Woodham will be giving readings in Gladstone until Saturday January 21.

Shopping isn't fun if you can see dead people

What's fresh at your local farmers' market

Chillies should be available at your local farmers' market. PHOTO: KATE O'NEILL

Chillies, figs, finger limes, eggplants are ripe for the eating

Agents desperate for stock as homebuyers circle region

Coorabell houses had a whopping median sale price of $1.4 million.

Lower price ranges stand out as Coffs property best sellers

7 quirky Airbnb homes on the Northern Rivers

Broken Head Bodhi Treehouse

Stay in a shipping container or treehouse for your next holiday

Controversial Iron Gates development renamed

Raine and Horne

Peaceful, pristine and perfect is the new motto for Iron Gates

'That’s the nature of commercial reality': Lismore council

GAME CHANGER: The $13 million proposal by Quest proposal is for a three-storey complex featuring 41 serviced apartments, 53 on-site carparks, 24-hour on-site management, a gymnasium and modern guest facilities.

"It's a shame the development is no longer on the table"

Thousands of jobs part of $1b retirement village project

THIS YEAR: An artist impression of the new Aveo retirement village in Springfield.

Aveo Springfield unveiled this month, homes ready by July

Ready to SELL your property?

Post Your Ad Here!