With the dust settling from the final report of the Financial services Royal Commission, we took the opportunity to ask Ben Rundle from NAOS Asset Management and Michael Wayne from Medallion Financial to rank the banks and nominate the winners and losers.
Tune in to hear why Ben thinks ‘the big four banks are a winner’ and which bank he is making a counter-consensus call on, as well as which one Michael prefers in the sector. We also discuss whether there are opportunities in the listed mortgage brokers, the wealth managers, and what we might now expect for credit growth and housing. Watch or read this latest thematic discussion to get the full story.
Matthew Kidman: My name's Matthew Kidman and today we're talking about The Financial Services Royal Commission which came to a conclusion about 10 days ago after a long and arduous period. To have a chat about it, we've got Ben Rundle from NAOS and Michael Wayne from Medallion. Welcome, gentlemen. The Hayne Plane landed last week, Ben, and it didn't seem like there was a lot in it for the banks, is that the way you read it?
Ben Rundle: Yeah, I think the banks certainly got off very lightly, I think through the whole period of this Royal Commission the banks have really had the screws put into them which has slowed credit growth significantly. I actually take the view that that's what's caused the selloff in housing prices and the flow on effect from that being consumer confidence. Now that the Royal Commission's over the banks are probably sitting thinking, "Well, we got out of that pretty well." I think the reputations of the big four are probably okay and now they can get back towards expanding credit growth and also too you've got APRA who have removed their restrictions on investor lending as well. So, I certainly think for the banks they'll be sitting there thinking, "Well, now we're in a pretty good spot, we can finally find some growth again."
Matthew Kidman: Well hold that thought, we'll come back to that. Michael are you as bullish and is the outlook for the banks a bit rosier than what it has been? Because they've really, really screwed down on lending, haven't they?
Michael Wayne: Yeah look they'll certainly be relieved with the recommendations that were made. There was no doubt they were marginally better than many of the expectations that were built into markets, but I do think the outlook still remains challenging, the risk and compliance frameworks are going to be a lot more challenging, the costs that are going to have to go into those sorts of things might well distract them from their core modus operandi which is generating revenue and earn sales growth. Although the recommendations weren't that harsh it's going to have, I think, last implications on how big businesses are run going forward.
Matthew Kidman: So if we look at the big four, which were under scrutiny the whole time and we saw the NAB, a few fallen soldiers post the commission, is there anyone that stood out that should do well or are they all in the same boat for the moment?
Michael Wayne: Oh, look I think they're much of a muchness, barring the NAB, except probably ANZ is in the best position at the moment and their interest margins I think are in the best position to benefit from prevailing interest rates at the moment, their cost growth is actually meant to fall and I think that's the only one of the big four banks which is interesting. So, I'd probably have to go with ANZ, their capital positions are strongest of the big four at the moment given they were first to go with divesting certain non-core assets. But otherwise I think CBA's still in a very good position, they've probably done a lot of their expenditure and getting their costs up and investing in things like technology well in advance of some of the other banks.
Matthew Kidman: Okay, so Ben you sounded pretty bullish.
Ben Rundle: Yeah.
Matthew Kidman: Have you got one, two or do you just group them together and say, "Just buy the sector"?
Ben Rundle: No, as a value manager and I will cop some criticism for this, I would actually buy NAB. I think the management change will be a good catalyst for them, yes there's cultural issues inside the business.
Matthew Kidman: Are we going to get a dividend cut?
Ben Rundle: There potentially is that possibility yes, but I think you're getting a 30% discount in terms of the PE valuation to the leader in CBA. And I think with NAB they were the last ones to adjust their standard variable rates higher so I think you'll get a little bit of earnings kick the next quarter. It's non-consensus, it's the riskier one to buy but I think on valuation and potential outlook I think that's the one I'd own.
Matthew Kidman: Now, the Hayne Plane though caused a bit of collateral damage, there were other sectors, especially brokers, mortgage brokers in particular.
Ben Rundle: Yeah.
Matthew Kidman: How do you read that? That he's basically pulled the rug, or the recommendations pulled the rug out from that industry?
Ben Rundle: Yeah, yeah.
Matthew Kidman: Should we be looking there around the ruins or not?
Ben Rundle: I think it's a great industry to look at, I take the view that I don't think the government will completely remove this industry. My view is that mortgage broking is very good for the consumer. There are other markets where the revenue model is a little bit different to how we do it in Australia with the trail commission, so while someone like AFG will have to adapt their business model, they do have time to do it because there's a working group that I think will monitor this situation for the next two or three years. You've got a trail book there which underlines some of the current valuation and gives you a bit of a margin of safety but I mean it's peak pessimism against this stock and I do think that the industry will continue to exist and I think that it will continue to favour the larger players and smaller ones will drop out.
Matthew Kidman: The Hayne Plane seemed to just gobble up what Commonwealth Bank and Westpac were putting forward about the poor old mortgage brokers. We've got a couple that are listed, do you think that the Hayne recommendations of making the consumer pay, paying out the trail will happen and, two, if so what do we do with these two listed companies?
Michael Wayne: Yeah, look it's certainly bottom feeding at the moment, pessimism is at peak as Ben's been sort of pointing out there. You have to be pretty game to step up to the plate just because I still think it's a bit of moving feast, I think it depends on whether the Liberal government retains power, whether Labour gets in who've come out pretty strongly against this at the moment.
But there's no doubt that if the borrower is forced to pay as opposed to the lender people are going to think twice about using mortgage brokers. Back to the banks, back to the banks, back to the bank branches, the fact that trail is being cut makes up probably 30, 40, 50% in some cases of the mortgage brokers income. So, it's going to have some big implications long term, whether or not the up fronts get pushed up in order to compensate the mortgage brokers for the lack of trail, these things will have have nutted out by these businesses and I just think there's not enough clarity at the moment to step up to the plate and pick up say an AFG or a Mortgage Choice.
Matthew Kidman: And do you reckon we saw one winner from the whole Commission?
Michael Wayne: Look, I think you'd have to go with the wealth managers probably. The vertically integrated business model was being called into question, having an internal financial planner recommending internal insurance products, internal funds, there is a lot of conflict of interest.
Matthew Kidman: "Too hard to unwind though." He said.
Michael Wayne: That's the problem, this is pretty well entrenched throughout the financial services industry and if you start pushing up cost too much for these sorts of wealth managers it might sort of deter people from going to get advice all together. So, I think the wealth managers probably got out of it the best because at some points there the likes of A&P, the likes of IOOF were threatened by the fact of being broken up. But that's not to say that APRA or ASIC won't come after these organisations elsewhere just because the Royal Commissions ended-
Matthew Kidman: Are they going to submission?
Michael Wayne: ... and the recommendations have come doesn't mean that there's not going to be something that pops up out left field as we've seen already with IOOF and A&P.
Matthew Kidman: Yeah, and we're in the game of picking winners and losers, Ben, out of the Royal Commission, was there a winner?
Ben Rundle: I think the big four banks are the winner.
Matthew Kidman: Yeah?
Ben Rundle: Genuinely yeah and I've said that I'd own NAB out of the four.
Matthew Kidman: Well the Hayne Plane landed, but it doesn't look like it caused too much damage. It was a smooth touchdown.