The banks are bastards — and making you wealthier

Despite a sluggish economy, wage stagnation and a visibly helpless government, Australians are poised to have a good year financially, thanks to a dirty, not-so-little secret about our banks: while we hate them, they make us wealthy. And 2019 is so far turning out to be an unexpectedly strong year for them. 

The Hayne banking royal commission drove bank share prices lower last year. And the recommendations from Hayne were going to make life hard for the banks this year and going forward — or so we were told. They’d already started setting aside and paying out what could end up being $6-7 billion (remember when it was $600-700 million?) in customer remediation costs, interest and other charges. These costs have forced dividend cuts and knocked share prices. With falling house prices, narrowing interest margins and tougher rules on their most profitable activity — mortgage lending — a lot of commentators saw only gloom and doom ahead for the big banks.

But the share prices of the big four have soared this year and helped drive the ASX 200 to a gain of 15.9% since the start of the year and more than 8.6% over the year since last June.

That is setting up the local market (if Trump and China don’t spoil things in the next little while) so that when the financial year and December half books are ruled off on June 30, millions of Australian investors, directly and through super funds, will find they have had an unexpected bonus in the shape of a positive return and possibly one of the best six month performance they have seen for years.

A financial year that was underwater at the end of December after the nasty fall of 9% in the final quarter of 2018 has turned around, thanks mostly to the 12%-plus average gain across the big four banks’ share prices so far this year. Strong iron ore prices and gains by the likes of BHP and Rio Tinto, plus the tech boom have helped, but the $60 billion-plus in added value from the rise in bank shares of the big four is crucial, account for over 75% of the near 16% rise in the ASX 200 this year. 

Up to Wednesday, Commonwealth’s share price has risen 10.3% from the start of the year (with most of that coming in the last month) and more than 17% since June 2018. ANZ shares are up more than 15% so far in 2019 and 7.4% in the past 12 months. The NAB, probably the biggest bank victim of all from the royal commission, has seen shares rise 12.2% since the start of the year and 11.4% in the past month alone. And for our second biggest bank, Westpac has had a 12% gain in the year to date.

Contrast that with the fortunes of AMP: its shares are down 8% in 2019 and down 39% over the last year — although that’s a lot better than being down more than 60% and more, as it was at one stage. But it’s looking like financial roadkill.

Why the turnaround for the banks? The banks themselves, rather than Hayne, embraced the break-up of the conflicted, vertically integrated financial advice and management models they’d spent a decade and a half erecting. They brazenly used an increase in funding costs to lift interest rates and then refused to lower them as funding costs fell back to 2018 levels. APRA helped by relaxing the rules on interest rate coverage for home lending. And the Reserve Bank has chipped in with an interest rate cut and possibly another down the track — while that will pressure their interest margins (where most of the profits come from), it will over time help make more people interested in borrowing.

And best of all, the government deliberately delayed legislation implementing Hayne’s recommendations until after the election, and immediately began caving in to lobbying from its financial industry mates. You might have noticed that since the government was returned, very little has been said about implementing the recommendations of a royal commission that the government only ever called because it politically had no choice.