Say ‘What’ Wednesday

Is it time to jump ship? Should you sell your bank shares?

Today’s question comes from Jake. He asks “should I sell my bank shares, given the recent fall out from the royal banking commission?”

IMPORTANT: This episode comes with a general advice warning! I’m not telling you to buy or sell… Instead I’m going to run through what the future of banking might look like given what we have seen so far.

But let’s break it down.

  1. The nature of the beast – Where profits come from
  2. Banks are diversified revenue models – out of top 5, they make up top 4
    • Lending and banking – CBA 45%, NAB 92.8%, ANZ 49%, WBC 39%
    • Wealth Management – CBA 9.3%, NAB 7.1%, ANZ 3.2%, WBC/BT 10.6%
  3. Banks are now selling off all the wealth management parts of their businesses.
  4. AMP (a diversified financial service company) generates 72.8% of their revenue from wealth management/financial services

So, what does this mean? … Prices are down

  1. Banks are at their 52-week low, CBA at a nearly 3-year low
  2. AMP – steady decline since 2015 from $6.83 to $4.15 – 37%

What will happen to profits?

  1. Big 4 – getting out of selling financial advice
    • Nab – MLC is being sold
    • CBA – CFS is being sold
    • WBC – still will have BT
    • ANZ got out mostly in 2013, so likely the least effected.
  2. AMP – Obviously will be hit.
    • may lose license if can be proven they have been criminal
    • If they lose their financial services licence – 70% of revenue goes.

Start of the analysis:

Fair value vs price

DISCLAIMER: this is based on assumptions

  1. Discounted cash flow of companies
Company Price Morningstar FV 3-year earnings growth
CBA $72.71 $71.19 1.44% p.a.
NAB $28.91 $29.07 2.30% p.a.
ANZ $27.62 $27.53 -10.16% p.a.
WBC $29.43 $29.23 -2.55% p.a.
AMP $4.12 $4.58 -5.35%
  1. Price: Supply and demand
    • It’s like fashion – Banks are “out of fashion” in the news
    • Prices determined by how much demand there is for the shares v how many are available. There doesn’t seem to be much demand for AMP.
  2. Dividend yields are where banks appear to have value!
    • Current prices vs dividends
    • BUT: Watch out for value traps! AMP at a 10% dividend yield seems awesome, but what happens if 70% of revenue disappears? All dividends will disappear as well!
  3. The Crystal Ball
    • The future of the banks is always unknown – Big 4 aren’t going anywhere
    • People know them and are at least perceived as safe, so that helps. But it’s going to be hard for them to attract much capital growth.
    • BUT: AMP may be in trouble. Won’t know the damage until September when the next round of information on earnings comes out.

The takeaways:

  1. Just because prices drop, doesn’t make shares great value to buy, especially if the inherent value (which is what’s important) is dropping also.
  2. AMP might be forced to change their revenue model and be regulated out of the market.
  3. Remember – Ratios stay the same until the update in earnings/dividends come out. There is a lag in information and therefore ratios may not be accurate.
  4. The future depends on what the banks decide to do with the gains made in the sale of the wealth management parts of their business, and that is up to management …

Thanks for listening to another episode of Finance & Fury. These questions have been great! Keep them coming….go to https://financeandfury.com.au/contact/

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