Peer­ing into a void

Don’t buy shares af­ter un­reg­u­lated sec­tor is tee­ter­ing on edge of bank­ruptcy

Finweek English Edition - - Companies & Markets - VIC DE KLERK

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.

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