Many in retirement are travelling comfortably, with three key factors contributing to their happiness – good physical and mental health and enough money to enjoy life.
Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Westpac shocker highlights sinking banking sector
Westpac (ASX:WBC) has been sold-off heavily this week after delivering an unexpected “shocker” of a result. Shares finished down 7 per cent on the day of reporting, despite the company reporting a doubling of profit to over $5 billion.
Analysts and fund managers were clearly concerned about the various mis-steps of management over the last 12 months; and seemingly long before that. In particular, analysts highlighted the fact that management had reversed its position of seeking to prioritise more profitable lending and cede market share as a result.
In 2021, Westpac appears to have done both, with the net interest margin continuing to fall and a significant increase in the number of lower-margin fixed rate loans on its books. It was a similar story for ANZ Banking Group (ASX:ANZ), which last week revealed that it had struggled to keep up with the demand for loans, with a massive backlog in processing and assessments ultimately capping growth.
The timing couldn’t be worse for both companies, with a growing cohort of specialised fintechs breathing down their necks in multiple sectors. The Buy Now Pay Later high-flyers may get the most coverage, but every part of the big banks’ business, from foreign currency to personal loans, business loans and personal banking, is under threat of disruption.
Every one of these fintechs is seeking to carve-out a share of the massive and growing sectors that the banks have dominated for decades, with more user-friendly, technology-focused and scalable platforms. And the timing couldn’t be worse for the traditional banking sector, with historically weak profitability being increasingly stretched.
Looking back over the last decade, it becomes evident that the franking credit system and obsession with dividends may have done a disservice to the sector. If you consider, for instance, the level of cash profit delivered by each of the major banks in 2011 versus today, the evidence becomes clearer.
In 2011 the banking sector was still recovering from the flow-on impacts of the GFC but ANZ and Westpac managed to eke-out profits of $6.1 billion and $5.4 billion respectively. Fast-forward ten years and the same banks have delivered $5.6 billion and $6.9 billion respectively. That is a 10 per cent increase in the case of ANZ and a significant contraction in the case of Westpac.
While this analysis doesn’t include any buy-backs, it also doesn’t include capital raisings and is clear evidence of the importance of reinvesting capital into your core business even when you have a monopoly. Competition and disruption is everywhere, and both the size and incumbent cost base of the banks makes it difficult to remain flexible.
The analysis also shows why the Commonwealth Bank (ASX:CBA) remains among the most valuable in the world, but also the highest-quality on offer in Australia. The bank has grown profit by over 30 per cent over the same period; while nowhere near a tech company, it is a significant improvement on the sector. And it has done so by doubling down on what it does best, investing in technology and remaining wary of disruption.
