The Two Vital Things for the Banks

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Outlook for ASX Bank Stocks - Aussie Big Four Banks

EDITOR’S NOTE: Exciting news! We’re making some changes to your daily Profit Watch service. I’m going to bring you a broader array of analysis and ideas to help your trading and investing.

I also need some help to carry the workload. Writing every day is great fun. But my premium trading service Catalyst Trader is now ‘officially’ live…and I’ve got dozens of stocks to track and trade.

Profit Watch will merge with the newsletter from where it came…The Daily Reckoning Australia! You may not know I was the chief editor of this before I set up Profit Watch. Soon you’ll receive your daily note under this banner. But don’t stress.

You’ll still hear from me at least twice a week. The benefit is now you’ll hear from my former desk buddy Shae Russell too — Australia’s best gold analyst, in my opinion.

You don’t have to do anything. We have your email and, I hope, your attention.

We’re still here to brighten your day, sharpen your mind and challenge your preconceived notions…and maybe even give you a laugh every now and again. Thanks for your continued support!

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Don’t forget that from tomorrow you’ll no longer receive these daily emails from Profit Watch.

It will come under the banner The Daily Reckoning Australia instead.

That’s great news for you! Why? You’ll get more analysis and ideas, of course.

Perhaps the strongest component of The Daily Reckoning Australia is its gold coverage. This is not something we jumped on after the latest rally. We’ve been covering gold since 2006!

There has been many a rally, dip and forecast over 14 years. But gold is still the same — inert, durable and, most importantly, not someone else’s promise to pay.

That is the opposite of a loan contract, of course. And that’s a problem if you’re in the banking business. All they really have is a lot of people’s promises to pay!

And how is that looking right now?

See this from The Australian

The banks are preparing for a wave of loan defaults by recruiting and redeploying thousands of staff to their hardship units, and the nation’s new external dispute resolution scheme, the Australian Financial Complaints Authority, is poised for an avalanche of complaints.

Hmm. The article also notes that the NAB chief exec said that 20% of his customers with deferred loans were failing to respond to the bank’s ‘check-ins’.

We can bet behind the scenes the government, the RBA and the banks are working on multiple plans to deal with these problem loans and dress the whole situation in a positive light.

A major problem for the banks…

What cannot be hidden from public view is the judgement of the share market. Bank stocks are wilting after their surprise rally a while back.

I doubt it’s just the problem loans. We also have the pesky Reserve Bank of New Zealand telling them to prepare for negative interest rates.

Oh dear. That’s a major problem for the banks. It upends their entire business model and costs them money.

I was warning about that this year. As far as I know, not one person paid the slightest attention. Bank stocks were bid up into the February peak.

‘For the dividends, you see’, seemed to be the vibe of that trade at the time. Unfortunately, anyone who bought CBA over $80 now has a hefty capital loss and a dodgy outlook for dividends.

Surely the banks will recover over time? That seemed to be the impetus for their recent rally — not to mention the Aussie government doing everything they can to bail them out.

I’m not sure. Digital currencies are coming to upend the last couple of centuries worth of tradition around banks. It’s possible they are already redundant, theoretically if not as yet practically.

You won’t find me scooping up bank stocks anytime soon. I think they’re a value trap more than ‘value’.

However, I’m open to being convinced by a counter argument. My friend and colleague Greg Canavan thinks the banks ARE value and a potential long-term winner.

Greg hasn’t pulled the trigger on the banks just yet. But he’s watching for the right timing.

At some point we could say that all the bad news and distress in the banks will get priced in. Then there are questions of how and how far they can rally.

The rally, if it is to come, must be led by a resurgent property market. Aussie banks mostly finance real estate transactions. The two go together in their twisted, symbiotic relationship.

So it is property and digital currencies we must watch for developments. 2021 is already shaping up to be interesting indeed.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch