I’m not sure about everybody else, but my first introduction to investment and the ASX was via the banking industry. The big four holding an Oligopoly in the financial markets and the promise of reasonably high dividends was often enough for me throw my hard earned pocket money at them. (There have been a lot of “shut up and take my money” moments in the past when that blue line on my screen moved below a certain point).
The Australian banks have been in a pretty good position in the past. Compared to the rest of the world, our banking markets face much less competition compared to the rest of the world. This is exemplified in the pricing power the banks hold as we see mortgage rates and credit card rates climb. Margins for credit card rates have doubled from 6% to 12% despite the low cash rate right now. As a consumer, this hurts me deeply. The thought that even saving my money, which I’ve been encouraged to do from a young age, is being exploited makes philosophical me sigh at the inhumanity. The investor in me however smiles sheepishly at the Australian banking system. It may be charging consumers a bit too much to keep their money in the bank but with the systemic risk reduced, the overall banking sector has become a pretty stable industry.
Obviously there is no such thing as “a gift the keeps on giving,” or I guess in this case, “a stock that keeps on climbing.” I’m sure many of you have read that bank profits are headed south with banks returns on equity were set to decline. Low returns would lead to the eventual decrease in the generous dividend payouts which many individual shareholders have come to rely on. There is even talk that regulators may require banks to hold more capital. That matter is being discussed in parliament this week actually. What happens if the act gets passed though? It could lead to banks being unable to generate the same high returns from previous years as speculators believe banks are unlikely to lower dividends despite lower returns. Instead, banks might just copped the loss but this means that they could be unable to finance loan growth and thus overall growth in the banking sector.
The high profits within the banking sector has been a topic of debate for a while now, so much that it has been affectionately nicknamed “bank bashing.” I’m not going to defend or attack the banks for their business decisions, or even the government for wanting to regulate the market because at this point in my life, it doesn’t impact me enough to form a real opinion on the matter. As young investor’s though, if a company is reaping in the benefits we might as well jump aboard for the ride. I guess now it’s just a question of whether the banks will continue the steady growth they have been experiencing or if it really is downhill now.
Cindy Liang