Bank probe gamble

WILL this royal commission into misconduct in the financial services industry impact the value of your bank shares?

We’ve been given many reasons why Australia shouldn’t hold a royal commission, including that our bank shares — held by most Australians by way of our super funds — will fall.

And let’s not forget the incredible cost in taxpayer funds that come with a commission.

Evidence indicates that some banks haven’t followed the rules and so need to be held accountable, but is a royal commission what we need?

Perhaps you believe, after hearing how banks continue to be caught out and yet still keep making so-called “bloated” profits, that the royal commission is needed to sort them out?

Firstly, let’s keep bank profits in context. While their profits may appear large in dollar terms, actual earnings per share are typically single-digit returns — and in some years earnings are low single digits.

Also, a royal commission doesn’t guarantee bank practices will change. Besides, if we need a royal commission to make banks operate more honestly, there’s something very wrong with the current system of self-regulation. So how do we fix that? Big banks have paid fines for misconduct in the past and what usually follows is a temporary share price fall.

As the turmoil around the banking sector has intensified in recent years, I believe that much of the negative sentiment has already been priced into bank shares.

So while prices may remain soft in the short term, probability indicates that a recovery is likely to follow. The royal commission will report by February 1, 2019. THE Australian market has been somewhat lacklustre during the past couple of weeks, however it has continued to edge higher to test the recent peak of 6124 points in November.

Given this, there remains the opportunity for our market to trade closer to the 62006400 target zone in December.

The announcement of the banking royal commission hasn’t shaken the broader market.

Remember that we need bank shares to rise for the overall market to continue higher.

Abroad, excitement over US tax reform has continued to support higher share prices there. However, once the market receives confirmation of the details of the reform, it will have been fully priced into US shares. That means we are likely to see this market take a breather shortly thereafter. Dale Gillham is chief analyst with Wealth Within