We have lightened our weightings in banks given the good run and hence valuations. I think the risk around APRA, ACCC supervision on rate settings, slower credit growth all point to subdued earnings for the banks. Until we get clarity on capital, I believe there is too much risk at these levels to have large positions in the banks.

The continued deterioration in net interest margin was the biggest theme to come out of the banks’ half-year results. The recent re-pricing of loans helped alleviate the impacts of continued front and back book discounting. I believe the market was hoping for a greater impact from re-pricing, instead it was used to help offset the discounting. Bad debts, costs, and capital meanwhile were all ok.

The biggest risk to the banks in the twelve months ahead, apart from a property market crash, which I can’t predict, is the interpretation by APRA as to what constitutes an unquestionably strong bank, and in turn the capital needed to confirm this statement. If we look at possible scenarios it could mean the banks begin to do underwritten DRPs to outright equity raises to get capital where it needs to be.