disclaimer: nathan bell does not own any of the stocks mentioned in this presentation the banks dumb...
TRANSCRIPT
DISCLAIMER: NATHAN BELL DOES NOT OWN ANY OF THE STOCKS MENTIONED IN THIS PRESENTATION
The BanksDumb questions for Intelligent Investors
July 2011
THE BIG FOUR BANKS JULY 2011
• The Australian Prudential Regulatory Authority (APRA) defines Authorised Deposit-taking Institutions (ADIs) as corporations which are authorised under the Banking Act 1959 to carry on banking business.
• ADIs include banks, building societies and credit unions. All ADIs are subject to the same Prudential Standards but the use of the names 'bank', 'building society' and 'credit union' is subject to corporations meeting certain criteria.
• In plain English what distinguishes a bank is the privilege to accept deposits.
What is a bank?
• Banks accept deposits from individuals and then make loans.
• Borrowing rates are higher than deposit rates allowing banks to pocket the difference.
• The ‘Multiplier Effect’ depends on the amount of reserves banks must keep.
How does a bank work?
THE BIG FOUR BANKS JULY 2011
Historically banks were focused on making loans. Today they are financial services giants.
Are loans the only way banks make money??
THE BIG FOUR BANKS JULY 2011
• The average interest rate spread between what banks receive on assets (such as loans) and pay on liabilities (such as deposits).
• It’s a measure of a bank’s profitability. Currently banks’ net-interest margin is being squeezed by intense competition for deposits, higher wholesale borrowing rates and weak credit growth that’s forcing banks to compete aggressively on housing loans.
What is the net-interest margin?
THE BIG FOUR BANKS JULY 2011
Westpac’s net interest margin
THE BIG FOUR BANKS JULY 2011
• The Australian Prudential Regulatory Authority (APRA) oversees the banking and financial services industry.
• Ensure depositors funds are safe, and that individual banks or the industry doesn’t pose a systemic risk to the economy.
Who regulates the banks, and why?
THE BIG FOUR BANKS JULY 2011
• Used to gauge the risks a bank is taking.
• Each class of asset is assigned a weighting based on the amount of credit risk.
• Assets with high credit risk receive a high weighting. Relatively safe assets, such as home loans, receive a low weighting.
• Banks are then forced to hold a minimum amount of capital against this amount to cushion the blow of bad debts.
What are ‘risk weighted assets’?
THE BIG FOUR BANKS JULY 2011
• Tier 1 capital is a measure of a bank’s ‘high quality’ or ‘core’ capital, which includes ordinary shares, retained earnings
and reserves.
• Tier 1 capital is then compared to the level of risk weighted assets to produce a ratio, which measures a bank's financial strength and ability to absorb losses.
• The current minimum ratio stipulated by APRA is 4% (the minimum total capital ratio is 8%).
What is the Tier 1 capital ratio?
THE BIG FOUR BANKS JULY 2011
• Australia has persistently had a savings gap i.e. we don’t have enough savings to fund investments.
• Banks rely on overseas funding (loans) to plug the gap.
What is wholesale funding??
THE BIG FOUR BANKS JULY 2011
Banks are among the most highly geared, and capital intensive businesses on the stock market.
Are banks highly geared?
ANZ WBC NAB CBA
Assets ($bn) 537 622 689 649
Liabilities ($bn) 502 580 650 614
Shareholders Equity ($bn)
35 42 39 35
SHE / Assets (%) 6.5 6.8 5.7 5.4
THE BIG FOUR BANKS JULY 2011
What are the key differences between the big four banks?
ANZ WBC NAB CBA
Assets ($bn) 537 622 689 649
Market Cap ($bn) 58 71 58 81
Return on equity (%) 13.9 16.1 13.2 18.7
Business Lending ($bn) 75 66 110 71
Revenue (Aust/NZ, %) 86 99 81 96
THE BIG FOUR BANKS JULY 2011
• Headwinds include low credit growth, potential economic and housing downturn, increased competition.
• Risky overseas strategies.
• Reliance on overseas wholesale funding.
What are the key risks facing bank shareholders?
THE BIG FOUR BANKS JULY 2011
• Appropriate for income investors due to high fully franked yields.
• We don’t expect large capital gains from current share price levels.
Do banks suit growth orincome investors?
THE BIG FOUR BANKS JULY 2011
• Due to high leverage, industry headwinds and banks’ reliance on the health of the global economy, we recommend keeping banks to no more than 10% of a well diversified portfolio.
• Financial services companies, including banks, insurers and fund managers like Perpetual, should be kept to no more than 25% of a well diversified portfolio.
What’s an appropriate portfolio limit for the big banks?
THE BIG FOUR BANKS JULY 2011