Forum Topics Banks and the financial sector
Seymourbutts
Added 2 months ago

I found last week's newsletter from Simply Wall St one of their better ones whilst I was having my Sunday morning coffee earlier today.

It's titled "Making Sense o the Financial Sector - Part 1", which gives you enough of a summary to what it covers. Trying to make sense of the entire Financial Sector in a 7 or so minute read of a blog post is very difficult to do, but this does seem to provide some good high-level points and topics. This quote got me (like any Buffett quote does):

“In the end banking is a very good business unless you do dumb things. You get your money extraordinarily cheap and you don't have to do dumb things. But periodically banks do it, and they do it as a flock, like international loans in the 80s. You don't have to be a rocket scientist when your raw material cost is less than 1.5%.”  - Warren Buffett

Whilst Simply Wall St is an American publication, it does raise some very current and topical points. Bringing it back home, I'm sure it is no secret that the Banks have been performing remarkably well this year, and whilst performance* (as in, SP performance*) should not be measured purely on one cycle, or a ~10 month period, it's worth taking a closer look to see what might be driving this (out)performance.

YTD the Australian market (ASX200) - is up roughly 8% (depending whether you look at XJO, the A200 ETF or the or any other index tracker).

Banks? Well, CBA ~19%, NAB ~21%, ANZ ~18%, WBC ~34% (wtf), MQG ~26%, or you could have got all (and some more) with the VanEck Aussie Banks ETF (probably not one Strawman holds) and you'd be up 23% YTD. Very decent.

Again, not worth judging an investment decision based off recent (YTD) SP performance, past performance is not indicative of future performance, AND how good is hindsight.

Apologies, I haven't dived into individual performance of each of the major banks, nor will I - so what is driving this? Unsurprisingly, earnings growth is essentially flat over the last ten years so this is purely a function of multiples expanding, considerably. Typically, this happens when interest rates rise, economy is strong, and the financial system is perceived as stable, and possibly TINA.

Aussies obviously love a bank, it just got me thinking, are the Australian banks a self-fulfilling investment? One would argue they are, they dominate the market, there are high barriers to entry, they're closely tied to the housing market which (which it could also be deemed a self-fulfilling investment), there is support from government and the superannuation funds and, Aussie's love for a franking credit and dividend yield.

What may disrupt the trend, YTD SP performance, or such a self-fulfilling cycle? Obviously an economic downturn (always a chance, and a guarantee - just when is the question), weakness in housing market, regulatory changes, and a global 'shock' (financial crisis, war, uncertain event leading to larger financial risk).

No specific insights here, but self-fulfilling cycles in investments is something I have been circling back to on a number of occasions recently, so I thought it was worth a share.

I do not hold banks directly, and my only exposure is in my ETF holdings I DCA into IRL.

14
Clio
Added 2 months ago

I've been mulling over this myself ever since the banks took off. IMO, there's a fair amount of TINA involved. There are at least 3 cash streams that must be pouring money into the banks, more or less by default.

1) The property investors who - either because they are being targeted for extra tax or can see that coming and are getting out , or who have reached retirement and suddenly realized that a negatively geared property doesn't produce income to live off - are selling out and that money has to go somewhere and the majority of these folks have never been share investors, so even if they speak with a financial advisor, given they need income, they'll be put into the banks, because that's what they'll be comfortable with.

2) the super funds themselves are taking in more money - the SGC went up to 11.5% in July and will go up to 12% in July next year. That extra inflow month to month - soon to be pay to pay - has to go somewhere, and the funds have to perform, so at least some of this has to go into the banks.

3) the ETFs - many younger investors are piling onto the ETF wagon as an easy way to start, which is understandable. But they will pick VAS, A200, etc as the ones to start with, and...that means money into the banks.

I would't be surprised if there are other streams - managed funds as well? - that are contributing to the inflows. Thing is, I can't see who/which group of those holding banks shares are going to sell. Those who hold them for Income aren't going to be displeased with the SP performance as long as the expected dividends continue to eventuate. And that's 'expected' in absolute $ amounts, not dividend yields, because most who invest in banks are unlikely to look at those (if they even understand them).

I'd love to know where this leads - possibly sideways edging upward slightly for a good long time?

17
Chagsy
Added 2 months ago

I’d suggest @Strawman s weekend email as a reasonable place to understand this phenomenon! Sorry, Andrew, hope that isn’t too sycophantic!?

It’s clearly an aberration and will revert to mean at some point. Who knows when? Who knows what the catalyst will be?

You can take a bet against it if you’re brave, or you can choose to put your money somewhere else.

As a tangential bear case, other than valuation, Revolut has entered the AU market. It’s worth having a read up on how disruptive they have been in Europe , though they did get -ve press for refusing to recompense account holders who were hacked/scammed. That have just got a banking licence in AU but I haven’t explored if this means they will have a $250k deposit guarantee.

For expats, “global citizens” and digital nomads - Revolut and Wise have basically replaced international services from banks and I believe this trend will continue to include most travel uses for your average punter. It’s an interesting space

I currently own no direct or indirect exposure to AU banks.

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