Thursday 2nd September 2021
Bank's market dominance facing existential challenge
Just what is China doing by limiting all kinds of activity and corporations? Many see this an authoritarian regime imposing restraint on its citizens. Yet this is not exactly unusual. Every domain imposes rules. Our local media content, our banks have been given the book on what they can and can’t do, our energy market is a political ball game.
Governments can’t help themselves but want to skew regulation. Conversely, the population votes with its feet, such as the adoption of solar energy in Australia, while the authorities are belatedly grappling with how to ensure supply under all conditions.
Banks have been cajoled into capital requirements, not helped by self-inflicted wounds and inertia, which as spun out a host of alternative options from BNPL providers, non-conforming RMBS and private credit. One doubts this was front of mind for APRA ten years ago.
Regulation of corporate activity is hardly new and, to be fair, may have society’s best interest in mind. Many seem to like the control on gaming China has imposed, while there was a groundswell of support for higher capital adequacy at banks post 2008.
The instinct is therefore to watch what is regulated and consider what alternatives could emerge.
Financial transactions are moving well outside the controls of regulators and citizens are welcoming these options. Banks are unlikely to come under intense pressure given their dominance and may plod their way towards the expectations of many disinterested consumers. It is however doubtful they will have anything like the lending growth they had before and therefore valuations should reflect the future.
Arguably of all services, a personal affinity to a bank has long been lost. Who really cares which one it is for everyday transactions? But for borrowers this is a different beast. Households don’t fit easily into the employed mum, dad and two kids formula any more. Many people prefer to be, or are required to be individual contractors, and then banks are far less friendly. The corporate sector is being weaned off banks and into bilateral loans to investors. Its not a simple exercise but its also unstoppable. This argument is not new, but the full consequences are likely to be much greater than anticipated.
The challenge is to find the way industries adapt to imposed rules and the consumer breaks with the past. Media organisations used to dictate what to watch and read when on their offered timeframe not one demand: that is almost laughable today.
It is doubtful the current banking system will have the influence it has had for decades. While some want to focus on the short term dividends, buybacks and cheap funding, the longer term question is what is defensible and what is open to being contested by others.
Unlike other global country indices the ASX200 has long been a sticky beast weighted to banks, resources and a few others. Here is a bet this decade could see a big transformation.
Giselle Roux is one of Australia's most well-known and highly regarded investment strategists, having held the role of Chief Investment Officer at both Escala Partners and JB Were. She has also held a number of senior equities analyst and investment banking roles including with Citigroup, Bank of America Merrill Lynch and McIntosh Securities. Giselle is a host of The Inside Network events, a member of the Advisory Committee and contributor to The Inside Adviser publication.
