Watch not what they say, so the saying goes, but what they do with their money.
That’s why the first stop for today’s Profit Watch is to peruse the news from Lifestyle Communities Ltd [ASX:LIC].
This company develops and sells houses for the over-55 demographic in Victoria.
They’re pretty good at it too. The stock listed for about 20 cents back in 2007. It was over $9 in January 2020.
Their biggest cost input is the land they need to buy in order to get building.
Are they preparing for a property apocalypse? No sir!
It’s the opposite, in fact. Lifestyle Communities announced this morning they’re buying.
Yep, they’re going to acquire a site in the suburb of Clyde North. It’s big enough to fit 275 homes.
I keep making the same case.
Those with the cash or financial muscle are going to be licking their lips.
They can buy sites and assets for the next leg up of the property cycle.
There’s more evidence right in front of us.
But wait! You demand more!
You’re in luck…
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A hint from Stockland’s latest update
One of Australia’s biggest developers — Stockland Corporation Ltd [ASX:SGP] — has also released their third quarter update today too.
They’re taking a hit from the pandemic, no doubt. The company is also keeping their guidance withdrawn until further notice.
However, one point jumped out at me.
Their residential housing division is already seeing enquiry levels recover to the what they were before all hell broke loose back in February.
It all fits in with the future sketch we’ve been drawing in these pages as far as the property market goes.
That’s a short-term hit before the cycle reasserts aggressively.
It’s also what makes the latest update from Commonwealth Bank interesting.
The headline news is that they’re setting aside another $1.5 billion to help with the COVID-19 fallout. That’s a hit to profits.
But digging a little deeper we can see that their home loan balance went up, at least until the end of March.
Those loans most likely stem from approvals before the panic.
So it’s the next set of results for this quarter where we’ll see just how much damage COVID-19 has does to lending growth.
It’s unlikely to surge in the short term, of course.
But I’m sure CBA and their shareholders will take a steady ship as a satisfactory result considering the circumstances.
Bank shares have taken a big hit in 2020. There’s a lot of bad news priced in at this point.
My take on their likely direction is sideways for the foreseeable future.
A value investor might make the case they’re cheap on conventional and historical metrics.
I’m not convinced they’ll ever reach their former glory again.
There’s a lot of competitive pressure coming to bear on them from each other, and upstarts all over the place.
Two worth noting are a ‘fintech’ start up called Verteva and a lending marketplace called LoanDolphin.
Big banks to underwhelm for 2020, and possibly forever
Verteva’s proposition is that the big banks are hostage to their legacy IT systems.
This makes them cumbersome in terms of customer service and generic in their risk assessment.
Verteva believe they can lower costs for lower risk borrowers. Will they succeed? I have no idea.
But there’s so much profit in mortgage lending that the banks will be fighting off challenges like this forever.
Open data and AI have the potential to rip open their cosy cartel.
It’s highly likely niche players target niche borrowing segments too.
Power is swinging toward customers as well.
LoanDolphin, for example, allows borrowers to register and have the banks bid for their business.
Mortgages are a generic product. Nobody gives a crap where it comes from except the price.
A system dynamic like LoanDolphin means banks could be forced to constantly cut their rates to the most competitive. That hurts their margins.
This type of system, if it catches on, is going to be a further pressure on the net interest margin banks can earn.
Those are already fairly constant already thanks to higher costs and a low rates.
Then there’s the biggest wildcard of all: cryptocurrencies. These are almost certain to be issued by central banks at some point.
What the private banking system looks like under such a regime is not clear.
But it’s certainly not going to look like the last 20 years.
If you think you can buy bank shares and bank the dividends and let time take care of the share price, I can only think of the wisdom of Darryl Kerrigan: ‘Tell ‘em he’s dreaming.’
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