Banks: if you can’t beat them, then join them
Big four’s profits trickle through KiwiSaver
This week’s market jitters were a reminder of what a shift in sentiment can do to volatility and subsequent asset prices. For many in the industry this was a timely adjustment for a market that has run “hot” in the past 12 months. What flew under the radar, though was the half-year financial result update for the Commonwealth Bank.
Often, when I read references to the big four Australian banks in a domestic context, it is one of offshore raiders (namely our Australian counterparts) generating excessive profits then taking these profits back home. The inference is that the Aussie banks are exploiting their New Zealand subsidiary businesses and the wider public. The royal commission in Australia seems to support this thought process.
While this element of the story is easy to latch on to, ignoring any “big brother, little brother” bias, the unwritten and more important part, in my opinion, is the ability of ordinary New Zealanders to participate in some of these profits, as well as the key role the major banks play in the overall efficiency of the local economy.
CBA/ASB announced this week a net profit after tax of A$4.7 billion to the December 2017 half-year. The debate over the size of the big four’s profits is for another article but what is important to understand is that 80 per cent of these profits go straight back to shareholders in the form of dividends. This percentage is calculated by looking at the dividend payout ratio across the Australian banks. The dividend payout ratio being the sum of the dividends paid divided by the sum of the cash earnings.
You may be thinking that equity ownership is only for the domain of the institutional investor. However, it is important to remember that thousands of New Zealanders will now own Australian bank shares through their KiwiSaver accounts.
Many KiwiSaver funds use the Australian banks as a secure and reliable investment. Profits go to “mum and dad” investors who for decades have been able to rely on Australian banks as a secure investment with good returns. Retail investors are also gaining access through the advent of passive investing in exchange traded funds (ETFs), which in a lot of cases replicate an index that will be buying an allocation off the banks. If we look at the current index weighting of the financials in the ASX200, this is currently sitting at 33 per cent.
I wrote in an earlier article that imposing higher capital requirements for the banks had the potential to hamper their ability to provide capital for businesses to fund economic growth. If we look at the residential housing market, the tightening in LVR restrictions has coincided with a cooling in prices and activity. In other words, when the availability of credit becomes more difficult, a slowing in growth will surely follow. The banks can be portrayed as the cause of such woes, particularly when they become stricter about lending growth. This more prudent approach is based on financial stability, bearing in mind that when the banks lend less, this in turn affects their profitability.
This piece is not designed to sound like a public relations exercise for the banks. Far from it. However, while this week’s events may have caused some to pause, from an investor perspective, it’s important to acknowledge that the ability of retail investors to participate in the growing profits of Australasia’s banks has never been stronger.
Therefore, it may be a case of, if you can’t beat them, join them.