Just a little update, ANZ fell because APRA whacked them with an additional operational risk capital overlay of $250 million, equating to 6 basis points of common equity tier 1 (CET) Capital. *insert face palm* See above point re regulation though.

Pretty much all of what you say about the banks is true @tomsmithidg, but I'd be careful of assuming Aussie banks are immune to issues that have brought others down.

Yes, we have (relatively) good capital requirements, but a big enough drop in asset values will still wipe them out (mathematically, they are insolvent if 8-10% of loans go bad, or something in that ballpark).

We can debate how likely that is, but its far from a non zero chance, imo. Remember, the US subprime crisis was deemed extremely unlikely, as these things always are. The Swiss giant Credit Suisse went bust in 2023 after 167 years due to their exposure to bad loans and a subsequent depositor exodus.

It's a story as old as time. And deposit guarantees won't help them in such an event.

You're right that the government (of either stripe) will do whatever they can to prop up the property market, although that's getting increasingly hard to do. Even dictatorial like powers can't defy economic gravity forever.

And they will definitely bail out the banks in any crisis, but as an equity holder you can still cop a nasty loss due to massive dilution.

Anyway, as bearish as I am on them, I wouldn't short them. But the risk/reward trade off right now seems like heads I win (a mediocre return), tails I lose (a lot).

I've beaten this dead horse for a while now, so apologies for being a broken record on this (or, is it chicken little?)

Stable coins in the US in particular to purchase their treasury market have the potential to create some issues for the banks and mainstay. Innovation has disrupted every single industry through the mobile phone app and the internet. Banking somehow has remained largely unaffected by this but I think the Sovereign debt crisis globally could have some impacts on what most believe as too big to fail organizations. Even if something is too big to fail it doesn't mean it can't slowly fade into obscurity even with government prop ups and subsidies. Banks and sovereigns are no longer buying treasury debt, that fat along with and ever increasing debt inflation means a solution has to be sought that the banks have not been able to solve.

A good discussion @tomsmithidg

I and I think most on SM would agree that the banks are among if not the lowest risk investment on the ASX, but I also agree with @Strawman that they are not without any risk as is portrayed by investment advisors and talking heads. To this point most are happy holding an ASX200 ETF as part of their portfolio or for super (which are heavily weighted banks as you point out), hence accept they have a place and purpose in most portfolios (me included for my super).

The objection to investing directly in them is the expected return at current prices (even before the large increase in value over the last year they were questionable). On an investment return basis the numbers don’t support them as a good return (especially ANZ, NAB, WBC with CBA being the exception and about in line with the market).

But it is quite arguable that on a risk adjusted basis the returns for the banks have been alright given dividends. So lets look at performance over the last 10 years, noting that price wise there has been little movement, ANZ, NAB and WBC are below the price of 10 years ago and CBA is up about 25%. However to avoid being selective on price movements (ie picking a price period to support a case) I chose to look at how the dividends have changed over the 10 years and below is the change.

Only CBA has increased it’s dividend and that is by less than inflation (ATO index figures). Compared to the ASX200 Accumulation index (XJT) which has doubled in the 10 years.

However, if we factor in dividends for the 4 major banks you have got a gross return of 6-8% per year, which is ok and factoring in the low risk they offer is actually quite good. Hence they can be a good part of a conservative portfolio – no objections there.

BUT, yes there is a but… Think about how house prices and by extension their loan books have grown over that period. @Strawman would make the point that the last 10 years (plus the 20 before that) has been a period of growth that can not continue to be sustained. Yet it in a period of exceptional growth for the banks businesses, they have not grown. Also note that the “real” value of dividends in terms of spending power is going backwards.

So what happens when (not if) this growth rate slows to system rate (aligned with income growth rate)? Is it reasonable to expect them to perform in the future as they have in the past?

Also, lets look at the price run the banks have had over the last 12 months and ask the question that even if we assume the housing market will continue to grow at historical rates, how much of the next 5-10 years of value for the banks is now already in the share price.

Unlike @strawman I am willing at this point to short the banks and have shorted CBA, simply because it has got to an asymmetric risk point that the downside is much greater than the upside at this point in the short term (also as a hedge for by bank exposure via super). Long term, this is just a bump and normal programming should resume sometime soon, at which point the price should drop so current dividend yields are higher than risk free rates.

So if you have held and plan on holding the banks very long term due to the risk weight return (ie for superannuation), then the current price should be ignored. If however, you are looking to beat the market over the next 5 years, getting out of the banks (subject to tax impacts) at the current prices will avoid a performance drag on your portfolio.

Buying at the current prices is just insane and those that are doing it are doing it with other peoples money and the safety of their jobs in mind rather than the return on invested funds.

We have very strong banks, a relatively stable government and economy by international standards, so Australian banks are globally a good place to hide in an uncertain world. As soon as that uncertainty goes or the pressure for good returns comes back, expect an exodus from our precious banks.

@Strawman obviously I don't want to jinx myself, but I think you're missing in the 'they are insolvent if 8-10% of loans go bad' maths, that the majority of 'risky' homeloans have mortgage insurance covering the banks' exposure. Also our market is different to the sub prime US market where the punter just hands back the house and they are debt free. The banks here generally have a generous 20% or so discount they can sell the house at and still get their money back, in addition anything debt left over from the property sale is still owed by the punter and can be sold off to various debt collection agencies. Ditto for bad business loans (and some personal loans) where the unpaid debt is sold off to debt collection agencies. Riskier loans wear higher interest premiums, front loading the bank recovering the money they've outlaid. I still reckon if our banks go bad the whole market is cooked and it won't matter where you have your money, other than Gold (*mumbles* maybe Bitcoin *choke*).

@tomsmithidg ive been posting similar for years, its a blind spot. i am interested if the market melts down and people want physical assets in their hands, and bank accounts are suspect, that BTC will remain firm being an intangible product with no utility and dependent on its value by the discipline of holders. will be interesting indeed. my best guess is disintegration but no one knows.

There are an element of those loans out there, however there is an increasing trend of advertising on social media for companies that will offer to pay your 20% deposit to avoid paying mortgage insurance. There are others that also will help you with a loan for upfront payments as well. One of the constant promoters of this service is Sucasa, and here's a summary:

Sucasa is an Australian non-bank lender that offers low-deposit home loans without requiring borrowers to pay for Lenders Mortgage Insurance (LMI). LMI is typically used by lenders to protect themselves against potential losses if a borrower defaults on a loan with a high loan-to-value ratio (LVR).Instead of passing this insurance cost onto borrowers, Sucasa employs alternative risk management strategies. For instance, they may split the mortgage into two parts, with the portion exceeding 80% LVR carrying a higher interest rate or upfront fee. This approach allows Sucasa to mitigate the risks associated with low-deposit loans while providing more affordable options for borrowers.​

They also mention on their website that they are backed by global venture capital and they have their own independent credit licence.

From my perspective, the increasing popularity of these services, and the rise of other non-bank lenders (i.e. Pepper Money, Liberty) over the past year or so brings a different level of risk in the event of an increase in mortgage delinquencies or crunches in equity. These global venture capitalists or non-bank lenders will have a vested interest in liquidating any loss leading loans promptly to protect the interests of shareholders. They would not be under the remit of any protections from the government implemented on banking (i.e during COVID) to stop banks from selling houses from under them due to non-repayment. I don't know if the government would look to implement something like this in the future, however there could be 2 potential options if there is a selloff in the future:

• Banks are competing with venture capital interests in selling distressed assets and have to take reduced splits.
• Banks are prohibited from selling distressed assets under government intervention which means they will only be able to sell once the market is already under pressure.

Yes there would be plenty of loans in there that would have some coverage from LMI that the banks could recover their costs. However, in a scenario like that where distressed selling is on the rise could start a snowball effect across the market and would impact growth in the loan book. It would also push many of those who don't have LMI insurance into that bracket and put them at risk if their circumstances were to change.

In the event that there is a slight downturn in pricing (5-10% could even do this), there will be an increasing number of people who bought homes after COVID using their super, and would need to kick in some extra cash to maintain their loan arrangement or they will add to the cohort above with distressed selling.

@tomsmithidg I agree with your assessment of the banks making up a huge proportion of the ASX 200, and this is why I am putting my money into individual companies and global ETFs instead of Australian ETFs.

I acknowledge that I am very pessimistic here and the likelihood of these risks materialising might not be high at all.

All fair points -- if the big banks are get in trouble, there's likely something terrible that has happened at a system level. I'm just pushing back against the idea that nothing can go wrong and Australian banks are different. That's always a dangerous assertion.

As with @Tom73 I just think that the risk return proposition at present is pretty ordinary, and also that a sustained and sizeable decline in property values is far from a non-zero chance. Maybe not likely, but nor is it a 1 in 100 chance

If there was ever a material risk of insolvency, the big banks would absolutely survive (if for no other reason that they would be bailed out "for the greater good"), but it'd still result in substantial losses for investors. EG. Bank of America & Citigroup both survived the US sub-prime crisis and GFC, but shares are still below their 2007 high. Morgan Stanly is again at (or near record highs), but they took 13 years to recover from the GFC.

Also, things like mortgage insurance, capital requirements, liquidity ratios etc etc (ie all the stuff designed to limit risk) are all good and well in most situations, but tend to be worthless when the issue is systemic and widespread. An analogy here is that a fire extinguisher is absolutely going to significantly reduce the risk of a house fire getting out of control, but it's useless in a raging bush fire.

Also, I agree that a major banking crisis would also see big falls across the sharemarket (and yes, all risk assets). There's nowhere perfectly safe to hide in such an environment. But what matters is which companies/assets suffer a permanent impairment, versus those that only suffer a short-term setback. eg The GFC saw Microsoft's share price drop 60% or so, but it's hard to even spot that dip from today's vantage point.

Also, I take exception to your "Bitcoin has no utility" @Solvetheriddle, but that's a debate for another time. Probably best over a few beers ;)

@Strawman maybe after a few!! lol

@tomsmithidg Good to get the bull case and you've made some solid points. I guess it depends what you want. A big business that's entrenched and unlikely to go bust, probably guaranteed not to fail by the government, that pays a reasonable dividend yield and is unloved by most of it's customers? Then yes you can make a case for owning the big 4.

But if you invest in individual companies to beat what you can get with almost no risk in an index fund, then the Big 4 are very unlikely to do that unless something improves significantly vs the last decade for them. Here is the detail of their business performance for the last 10 years -

Despite significant sales '/ revenue growth over the last 10 years, with the exception of CBA they are going backwards on all the key measures of business performance. Lower earnings per share, lower ROE, lower dividends. CBA has got a little growth in earnings and the dividend. But if you look at it in real / inflation adjusted terms they have all gone backwards, big time.

Yet the market has been prepared to pay 20% to 60% more for each dollar of earnings than we were 10 years ago.

That seems very unlikely to continue. It's a much higher probability that multiples compress from here, if earnings don't start growing again soon. And we have been in a hot housing market for most of the last 10 years, so we can hardly say conditions haven't been helpful for them.

Good luck to those that hold but I wouldn't invest in any of them (at these multiples) with free money...

@Karmast , for sure mate, but a lot of that reduction in ROE has been a result of the restrictions placed on them via the APRA, and increased regulation (plus increased competition as a result of customers being more mobile). The banks have the equivialent of an engine's speed limiter on them. All of this limits the overall risk of loss of (total) capital. Compression of multiples is a buying opportunity from my perspective and obviously you always want to buy at a price multiple and earning that you are happy with.

Looking at ANZ over the last 18 years, for example, the average closing price has only been above $30 for five of those years, but it has been above $25 for 11 of those years. At a macro level any opportunity to buy below $25 looks pretty good and less than $30 pretty safe.

I also did a little exercise out of curiousity, using Chat GPT so take it with a grain of salt and when I can find the motivation I will look at doing it manually, comparing buying $5000 of (Every fanboys' favourite) Berkshire Hathaway B shares every year for the last 18 years, vs ANZ and NAB including reinvestment of dividends. The formula used the 'Average Price of Shares' for each year so again not the best measurement. The brief results are below.

Berkshire Hathaway B - average annual growth 1.73%

ANZ - average annual growth 2.31%

NAB - average annual growth 4.03%

Again these figures don't include the franking credit benefits, and again, Free Chat GPT, so figures could be complete rubbish.

Hey @tomsmithidg I asked my (free) ChatGPT to calculate the growth of $5000 of $BRK.B purchased18 years ago and it looks more like a 10%+ growth annually.

Here's a screenshot:

@tomsmithidg Yep they are regulated and have also lost most of the goodwill with the public / government they used to have after all the revelations that came out during the Royal Commission. This makes them less attractive than they used to be unless you think that's going to change (I don't).

As far as buying when the multiple compresses, the only point I'd consider buying is when they would be so low that they'd become a imminent takeover/merger target with a quick premium. Hard to pick that point though and again open to all kinds of regulatory challenges.

Otherwise, your buying a business that's now shrinking most years and in turn the multiple will go up each year from your entry point unless the share price keeps dropping.

They are classic value traps based on what's known today in my view...

@lowway yeah it wasn't a one off $5000 investment, it was $5000 every year at the average price for each year. An analysis of the much vaunted, 'just buy regularly no matter the price' approach.

I just looked back at the prices used by Chat GPT for BRK.B and they were totally wrong, so good lesson here re limitations of AI. Here's what it gave me when I asked today for the average BRK.B closing price for the time period (was different again to the first one in my post)

Here's what it is online:

Here's the response when I made it recalculate using the actual data set above (bear in mind the conversion rate is at 75c US to the AUD which wouldn't be right for each year.

The average percentage increase in value for an investment of $5000 AUD each year in BRK.B from 2008 to 2024 is approximately 211.04%.

This means your annual investment would have grown by an average of 211.04% each year over this period, reflecting significant growth in Berkshire Hathaway's stock price.

Of course now I don't trust Chat GPT's calculations either, so I'd want to do the maths myself, but that calculation gives the following result:

The total percentage growth in value of your investment, if you bought $5000 AUD of BRK.B shares every year from 2008 to 2024 and reinvested annually, is approximately 361.05%.

Thanks for the update on the figures and limitations of chat gpt @tomsmithidg!

some really compelling numbers there for Berkshire B shares compared to the banks.

Just shows the power of compounding and how great it is that uncle Warren doesn’t pay a dividend and reinvests it back in for further growth.