We’ve been on a mission for you over the last few weeks to nut out the outlook for the big banks.
Today we have no choice but to go back to the wagyu beef and Shiraz debate and other cases.
The outlook for the Aussie banking sector — and therefore the wider ASX — hinges on the repercussions of all this. Not to mention your dividends!
What’s the story?
In August, a federal judge ruled in favour of banking behemoth Westpac when he said they did not engage in irresponsible lending.
That case came after regulator ASIC alleged that the bank did so by relying on something called the Household Expenditure Measure.
The judge’s assessment was that knowing a customer’s expenses was not the same as the conceptual maximum or minimum they could afford.
He illustrated this point in a colourful way. He said a customer could eat wagyu beef and drink fine Shiraz all day. The bank would know this via its analysis.
But to afford a house repayment, that same person could cut down to more ‘modest fare’. Think, for your average first home buyer, two minute noodles and water.
That was the judge’s take, anyway, but there’s a catch. ASIC isn’t having a bar of it. They’ve appealed the decision.
However, as the ruling stands now, it leaves the banks with a much less stringent atmosphere when people apply for loans.
It also reduced Westpac’s potential liability from aggrieved borrowers had the ruling gone the other way.
As a bank shareholder, that’s a positive as it creates less uncertainty and a bigger pool of potential customers.
But ASIC’s appeal is still pending, so we’ll have to see where this goes from here.
Stoush number two for Westpac
But that’s not all when it comes to the courts.
The Australian this morning flags another round of compensation costs that could hit the banks from a separate issue.
ASIC and Westpac are head butting over another case involving the line between ‘general’ and ‘personal’ advice.
This stems from a period when a Westpac subsidiary used a sales campaign to roll super fund balances into its funds under management.
The Federal Court has now found, on appeal, that Westpac breached financial advice laws.
This overturned a previous ruling in favour of Westpac. Westpac, as yet, does not know the cost of the penalty it will pay.
The danger for the banks is this opens them up to further remediation costs hitting them after the billions they’ve lost already.
Plus, it leaves a more murky grey area in handling this business environment. None of that gets the pulse racing when it comes to their share prices.
I’m currently reading journalist Adele Ferguson’s book Banking Bad.
Believe me, if you bother to pick it up, you’ll have zero sympathy for any bank and its legal stoushes and complications.
However, our beat is money here at Profit Watch, not morals.
All I can say is I can’t see the index taking off until these banking issues are resolved. It may not be to satisfaction, but we’ll at least settle for clarity.
We’ll have a little more of that once NAB’s results — due today — are digested. Stay tuned for more on this.
Right now, I’m finding it hard to get the pulse racing about anything…
A cool head for slow times
The big surge we saw in the first six months of the year set a high bar to beat. The remainder of 2019 so far feels a bit flat by comparison.
The good thing is this gives us time to go over stocks with bright prospects with a cool head. 2018 was like that.
There was little momentum then — but it laid the foundations for some fun fireworks later.
The question remains: How much pent up demand for stocks lies latent if the clouds on the horizon — slow growth, trade war, banking blues — clear?
There is certainly plenty of dry gunpowder over in the United States. The Wall Street Journal reports that Americans hold over US$3 trillion in cash in money market funds.
One wonders what the equivalent figure is here in Australia. I don’t know the answer, but I’m sure there’s plenty of money on the sidelines here for the same reason.
Our little playbook here at Profit Watch does not find it unreasonable to table the possibility of the stock market into new all-time highs at some point.
But I do think all the skeletons in the banks’ closets have to be exposed first — even if it seems almost inconceivable there’s any left. We’ve certainly seen plenty already.