5 December: D Day for the Aussie Banks – RBNZ’s New Capital Regime

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D Day for Aussie Banks - RBNZ's New Capital Regime
5 December: D Day for the Aussie Banks - RBNZ's New Capital Regime Guidance

Oh dear. The Australian banks just keep spewing out more bad milk than my one-month-old daughter.

Westpac could now be on the hook for a potential $1 billion fine after breaching money laundering laws.

The bank fell 3% yesterday. The Aussie index went down with it.

This will no surprise if you’ve been with me for a while.

I’ve been warning that the banks were likely to keep suppressing the Aussie market from rising.

It also seems to be killing sentiment across the smaller stocks too. Momentum is hard to find. Short version: it’s rough riding out there.

What’s worse is that the fines and issues are not yet resolved.

NAB just agreed to pay out nearly $50 million in regards to a class action lawsuit.

Westpac has a few of these outstanding and there might be more coming.

That’s before we even get to the big gorilla in the room.

On 5 December the Reserve Bank of New Zealand is going to release its guidance on the new capital regime it wants.

This could cost the big Aussie banks even more money, not to mention lowering their return on equity in a key market.

I’ve been warning about this for a while, because nobody else seems to mention it much.

Certainly the Aussie bank chiefs have a point when they say the plans of the Kiwi Reserve Bank are way too aggressive.

But they’ve now trashed their reputations so badly that such a defence only looks self serving. The Kiwis can run riot and no one will fault them for it.

The ABC show about advertising, Gruen, springs to mind here.

It’s going to take a lot of money and creativity to rebuild the banking brands from here. Who wants the challenge?

None of this helps us make a buck. But sometimes you just have to play defensive in the market.

Now is not the time to be blindly chasing after those — at first glance — lusty bank dividends.

They come with significant capital risk and could be cut anyway.

There is some hope for the banks. And that’s the Aussie property market heating up and returning to strong credit growth.

We’ll see on that.

Right now, we want to dig around for pockets of strength.

Look to this sector right now

The wider top 50 is in pretty good shape, and the miner sector looks positively virtuous compared to the finance guys.

There’s a lot to like about mining stocks right now, especially the mid- and small-cap players.

A lot of them trade on extremely cheap valuations.

If there’s not much momentum in the market, like now, we can expect the value guys to start putting money to work. They’re bound to look at natural resources.

It’s one area where you can find stocks with good cashflows but not pay through the nose to access the earnings.

A lot of noise is made around the trade war when it comes to the outlook for commodities. But the world keeps turning and consuming each day.

Anything that holds back investment is just setting up the market for a prodigious rise across the commodity space.

I’m not saying it’s imminent.

But we’ve been running down a lot of inventory across the world now for a good many years. It cannot last forever.

Narratives, however, and not facts, tend to drive investor behaviour.

There’s no overarching narrative (China Boom, Peak Oil) to drive the big sentiment and liquidity shifts you need to really fire a particular sector.

It could, and will most likely, come from gold if such a narrative is to develop.

The ructions across the monetary system are forming the cluster of points to return gold to the centre of conversation.

The ECB war on freedom and cash

Look no further than Germany where the European Central Bank is now coercing banks to charge small depositors because of its negative interest rate policy.

The writer for the Financial Times says1 that this is ‘upending’ the country’s banking sector.

He might have said destroying it. Private banks can’t flourish in a negative interest rate regime.

Why would the ECB do such a thing? Clearly it is paving the way for the introduction of a European digital currency.

In the meantime, it’s quite possible Germans, and the wider euro market, start to buy gold to escape the penalty of holding cash.

Australian miners are certainly well placed to sell it to them under such a scenario.

Regards,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

1 ‘German Small Savers Hit…’, Financial Times, Nov. 20, 2019.