Peering into a void
Don’t buy shares after unregulated sector is teetering on edge of bankruptcy
FINANCIAL SHARES – from banks to insurers and other specialists – are losing their investment glitter. Exposure to the sector is already being quietly reduced by several South African and international asset managers – with good reason. In a recent report entitled Peering into a void, the authoritative Bank Credit Analyst stated the following:
financial sector has ended.” the financial sector) is set to explode.” ing for any investor to avoid financial shares as much as possible. Worldwide, the unregulated financial sector has driven itself to the edge of bankruptcy over the past 30 years by the uncontrolled attraction of risk just for the sake of profit and bonuses.
Governments have had to of US dollars from taxpayers to save the financial sector from its own folly. Even in Australia, the country of our sporting friends, week that aid to the value of A$40bn to the country’s financial sector had made a big hole in its fiscal budget.
Fortunately, it hasn’t yet been Manuel, who has a fondness for fiscal surpluses, to use the at the cost of, but for the benefit of, taxpayers – to rescue idiotic bankers from their own follies. It doesn’t look as if this will be necessary either, but that nevertheless doesn’t make SA’s financial shares the same attractive investments they were a few years ago.
prospects of three of SA’s Big Four are set out in their own words. Forget for a moment about the apparently attractive earnings multiples and dividend yields at which bank shares are trading and focus on future profit growth. If the CEOs of the banks aren’t prepared to stick out their necks and see any light ahead in the tunnel, that’s so much more reason for investors to avoid such shares.
All of SA’s banks are trying to blame the current stagnation in profit growth on the international uncertainty, but they all admit that the increase in local unrecoverable advances is the main reason why the bottom line – profit for shareholders – is stagnating and could even fall.
Nobody is prepared at this stage to admit, or at least to explain to shareholders, exactly where SA stands in the debt orgy of the past five years, in which household debt as a percentage of disposable income rose from
Nor has anyone in the financial sector commented yet on the International Monetary Fund’s concern that there’s a large SA’s borrowers and that several of this country’s new borrowers haven’t yet experienced a full interest rate cycle.
But let’s return to the Bank Credit Analyst’s remarks. Over somewhere in 1982/1983, after
– an era of falling interest rates started.
New financial instruments were developed, which gave the sector an almost unlimited capacity to create new credit. fore profit when everything was still going well to own capital in the sector was blown up, even as much as 10 times the responsible norms prior to 1983.
– created largely by themselves – to destroy them increased. A little more bad debt in a small portion of their business – the so-called sub-prime or lowquality mortgages in the US – was enough to bring down the also the end of the financial sector’s golden era.
its investment opportunities looks bad. Note again the BCA ments is set to explode.”
In almost all the G7 countries governments are large, in some cases the largest, shareholders in the banks and other financial
players, such as AIG, one of the world’s largest insurers.
It’s almost reminiscent of the wave of bank nationalisations between 1960 and 1970. However, this time it’s not voluntary or at the insistence of voters. In fact, voters as well as current finance ministers have had quite enough of the forced investments they’ve had to make in the bank sector.
In many cases, such as in the US, that gives new US president elect Barack Obama the wonderful gift of a fiscal deficit domestic product and national debt in excess of $10 trillion.
Even Australian Swan’s remark – financial crisis has smashed a A$40bn hole in the budget” – doesn’t sound like that of a very happy man. A A$40bn hole is more than GDP.
For the financial sector’s prospects, investors must look recovery in certain share prices over the past few weeks. Consider carefully the BCA ’s comment: to explode.”
role of governments in the economy and, more specifically, the financial sector. And, even more specifically, regulations affecting the financial sector.
British Prime Minister Gordon Brown, the man who still deserves the credit for his plan that saved the world’s bank sector, speaks about the need for international regulation of the financial sector. An international effort by governments was necessary to save the sector and the banks that are so keen to establish subsidiaries on remote islands can hardly expect to escape international regulation.
and intervention can already be seen. Banks that received direct shareholder assistance will have to make adjustments – from their dividend policy to payments to top management.
fore the extent of the assets on which income can be earned relative to own capital – is one of the ratios being critically looked puts a damper, perhaps a healthy damper, on the profitability of the financial sector.
Also take note again of the BCA’s first general remark – sector has ended” – before bank shares are bought purely on the strength of attractive historical multiples and dividend yields. called growth – that ensures the long-term return on an investment may perhaps be absent.