Big Banks: ‘Off With Their Heads!’

23

We began this year with a thesis: That the Aussie market would move up as the twin engines of the big banks and the big miners fired together for the first time in years.

I put it like this. The banks were strong from 2012-2015. Then the miners took the baton from 2016-2018.

2019 could see both finish the year up — and potentially take the Aussie market into all-time highs.

It would be misleading to say the banks are firing. But they do seem to have stabilised at least.

It’s the miners that are creaming it right now. That’s largely thanks to the booming iron ore market.

But the banks do have one trick up their sleeve while credit growth remains low: Sacking a lot of people.

There’s plenty of this coming up…

The Australian reports this morning[1] that ANZ Banking Group [ASX:ANZ] CEO Shayne Elliot could fire 8,000 employees in the next three years.

The journos at the Oz have that pegged as a quarter of the workforce.

ANZ has already been wielding the scythe and wearing the Scream mask on this front. ANZ’s total workforce was over 50,000 in January 2016.

It’s under 38,000 now.

All this follows on from the news that the Commonwealth Bank of Australia [ASX:CBA] could have 10,000 staff in the firing line too[2]. That equates to a potential saving of $2 billion.

It’s an ‘easy’ target for the bean counters. Staff expenses make up about half of the bank’s operating cost.

All those people are human beings with mortgages and families and commitments. Any discussion of the benefit to shareholders is inevitably callous.

But the market does not make a moral judgement. It counts dollars. As these expenses go down, it will feed into higher share prices — presuming the banks can hold up their earnings.

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That’s not all…

The banks are also getting a reprieve in an unexpected way.

I need to return to something I wrote last year to put this into some context…

Big miners bail out big banks

In October last year, I tried to convey how the unexpected strength in Australia’s terms of trade was putting the federal government in range of a budget surplus.

But it wasn’t the windfall that mattered for the voting public in terms of political boondoggles and election spending.

It was the effect on Australia’s triple-A credit rating. This was under threat of downgrade not so long ago.

That’s no longer the case. The cash pouring in from our natural resources exports makes the government look fiscally responsible.

Iron ore was US$72 a tonne in October last year. It’s nearly US$100 now.

What’s this got to do with the banks?

This rating helps keep the cost of their funding in offshore markets low. When Australia’s credit rating goes down, their expenses go up.

The triple-A credit rating allows them to keep mortgage rates lower than otherwise. Indeed, they’re cutting rates now because demand for loans is relatively weak.

This is a very important thread to follow for Australia’s financial stability. Housing debt is our biggest weakness.

The good news is that I don’t see this natural resources trend slowing down anytime soon.

Natural resources bull market to continue…

The Australian Financial Review reported yesterday[3] that miners are still reluctant to invest.

They were burnt so harshly in the previous downturn that they’re now bordering on paranoid.

This is setting up the world for a long run in higher prices across the commodity space. That’s why the mining sector is the one to be hunting for some fast gains.

I’m not shooting my mouth off here. It’s happening right in front of us.

Here’s what Profit Watch said back on 3 April…

Some metals are moving already. Zinc inventories just keep going down while the price just keeps creeping up. There’s a chance related stocks could really run if that price decides to break out.

We know, we know. Zinc neither has the good looks of gold or the interesting past. But we see a lot more profit opportunity in the former over the latter.

Zinc was up again overnight. Gold was down.

Two names you might like to keep an eye on via a watchlist (not recommendations!) are Red River Resources [ASX:RVR].

This shot up 16% yesterday after a great quarterly report (of course, that’s in the price now, short term).

Another one is New Century Resources [ASX:NCZ]. It’s up around 40% for the year alongside the zinc price.

Of course, I could be wrong about the direction of the zinc price. It’s sensitive to the economic outlook.

However, the world needs to sign some cheques to fund further exploration and development for the raw material base across a range of metals.  

Otherwise, a day will come when there’s no supply at any price.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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