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



Man shouts "get out of my country" before fatal shooting

Adam Purinton, of Olathe, Kan., who was arrested early Thursday, Feb. 23, 2017, in connection with a shooting at a bar in Olathe that left one person dead and wounding two others.

A Kansas man has been charged with shooting dead an Indian man

GALLERY: Police raid Nimbin shop

A man will face court today on alleged drug supply charges after a raid at a Nimbin shop

Police executed a search warrant at a store on Cullen Street

She confronts her abuser after 50 years, forces a confession

SURVIVOR: Debbie McDonald was sexually abused by her stepfather almost 50 years ago.

"This is our little secret" he would tell her.

Local Partners

Cars toot during Lismore street protest

Motorists gave their morale suuport to a street protest about refugees on Saturday


Northern Rivers gig guide

PIRATE FLAG: The Hussy Hick's latest single is a crowd favourite that echoes a sentiment of political scepticism. Hear Pirate Flag at Tintenbar Upfront, Tintenbar Hall, tomorrow 7.30pm. $20.

What's on this week in local entertainment

Top 10 things to do this weekend

Reece Smith, Ernie Angelosanto and Shayne Smith will compete for the top of the leaderboard at this weekend's Jodie's Inspiration Golf Day.

Are you looking to get out and about over the next two days?

Teeing off to support Jodie's Inspiration

Reece Smith, Ernie Angelosanto and Shayne Smith will compete for the top of the leaderboard at this weekend's Jodie's Inspiration Golf Day.

Vie for the top of the leaderboard, if you dare

Un-American tale makes Lion weakest link in Oscars line-up

PSYCHOLOGY researchers find US films and actors most likely to win accolades at the Oscars.

Can rightful winner Midnight take out golden Gosling in Oscars?

Can Lion pip La La Land at the post in this year's Oscars? Sunny Pawar (pictured) helped bring a powerful film to the big screen.

WILL Aussie film Lion triumph or will popular La La Land prevail?

Living End, Grinspoon stars hit stage for American Idiot

Chris Cheney of The Living End stars in the Australian production of Green Days musical American Idiot at Brisbane's QPAC Theatre.

TAKE a look behind the scenes of Green Day's American Idiot musical

Northern Rivers gig guide

PIRATE FLAG: The Hussy Hick's latest single is a crowd favourite that echoes a sentiment of political scepticism. Hear Pirate Flag at Tintenbar Upfront, Tintenbar Hall, tomorrow 7.30pm. $20.

What's on this week in local entertainment

Samuel L Jackson dismisses La La Land ahead of Oscars

Ryan Gosling and Emma Stone in a scene from the movie La La Land.

Hollywood actor and Oscars voter says Denzel should win top gong

The trick homeowners are using to buy more properties

Chantelle Subritzky leaves her home each week for Airbnb guests.

Queenslanders are going down this path to help pay their mortgages

Stunning home blends South Pacific beauty with Orient style

Immaculate residence with two outdoor living areas

$140k damage: landlord says property trashed, contaminated

He had what he calls "the tenants from hell"

Submarine, buses and 3000 tyres removed in $100K clean up

The list of things removed from this property is beyond astonishing

Ready to SELL your property?

Post Your Ad Here!