Christopher Joye

Today I question whether ScoMo and APRA "boned" NAB's Henry and Thorburn - it was somewhat coincidental timing given ScoMo had called for their heads 24hrs earlier - and reveal that Labor will be giving the banks an incredible $2.6 billion annual profitability gift by forcing consumers, rather than banks, to pay for their mortgage distribution costs.

More generally, I note that Labor's response to the royal commission recommendations is odd: it has gone from agreeing to implement them verbatim before the report was released (and they had an opportunity to interrogate the proposals) to now back-tracking and verbally stating they only accept them "in principle", which means they can disagree with the detail of every single one. This contrasts with the Coalition's detailed written response outlining how they will implement each individual recommendation and where they agree/disagree. The politics of this royal commission are also interesting insofar as the RBA governor, Phil Lowe, has taken the unusually partisan step of backing the Coalition's partial rejection of the royal commission's recommenation on mortgage brokers. This is also the only recommendation that Labor has explained it will accept in full without condition, which, as noted above, gifts the banks $2.6bn per annum.

Bill Shorten says ScoMo is the best friend the banks have ever had, but it is easy to bash them in opposition. He does not mention that ScoMo personally introduced the unprecedented big bank tax in 2017, which taxes the four majors' implicit government guarantee that artificially lowers their funding costs. This tax is costing the majors more than $1 billion annually and was a bold and entirely unexpected policy initative championed by ScoMo as treasurer; (click on this link to read or AFR subscribers can click here). Excerpt below:

On Wednesday the prime minister, Scott Morrison, publicly declared that NAB’s chairman and CEO “should consider their positions”. By Thursday night both had been “boned”. It would not surprise me at all if the board had been nudged to do so by APRA and/or the government. While sad for the individuals concerned, who have doubtless given much of themselves to the enterprise, it was beyond time. More than any other bank, NAB desperately needed generational change with adroit politician Mike Baird waiting in the wings to assume the leadership mantle. If anyone has a visceral understanding of the importance of meeting community expectations, it is Baird, a long-time banker who after securing the highest possible political office in state government has returned to the fold at just the right time.

For investors, the Royal Commission delivered what we originally expected, which can be summed up as: bad for equity, good for debt. Put differently, the banks will become much more risk-averse, slower growing, and increasingly mono-line, savings and loans utilities, stripped of non-core distractions. Their returns on equity will, as we have long forecast, converge towards their cost of equity. And this means they must trade around book value—a radically different result to the three times book value multiples that prevailed as recently as 2015. 

At the same time, the unprecedented build-up of first-loss equity reserves that APRA has presciently forced through, which is now being amplified by the Reserve Bank of New Zealand’s requirements for the big four’s subsidiaries across the ditch, has effected a huge deleveraging of these beasts’ balance-sheets. That in turn reduces the risk of default on all securities that rank above ordinary shares in the corporate capital structure, including hybrids, subordinated bonds, senior bonds and deposits.

 



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