Despite the GFC experience, there is no sign of meaningful reforms or any shaking up of Australia's insular four-legged banking arrangements.
As Christopher Joye pointed out in a recent AFR article, members of the government's Murray inquiry are dominated by ex-big-four CEOs or directors, and include the defensive David Murray as chairman. There are no representatives from the wider finance industry, let alone borrowers. It very much looks as though we can expect more wall building, wrapped up in a little verbiage.
Smaller banks and institutions will continue to play on an uneven field and borrowers will be left to do what they can. Meanwhile the big four will go on embracing moral hazards (residential lending to the limits); confident in the knowledge the taxpayer is there to bail them out. Is this comment unfair? – I certainly hope it proves to be so.
Whatever the outcome of the inquiry, there are two problems the big banks are unable to dodge – the over reliance on offshore funding and the impact of disruptive new forces in the consumer / home mortgage area. Amazon, PayPal and Google are in a position to grow consumer payments and some new innovative mortgage providers will continue to take market share with superior processes. Longer term, lending margins are certain to be squeezed as consumer and residential loans become further commoditised.
So, which major banks are in the best position to handle the upcoming challenges? Not surprisingly, the answer correlates to the percentage share of the housing mortgage market – the lower the better. It is the housing mortgage market which remains most vulnerable to rising interest rates, funding adequacy and more progressive entrants.
Australia and New Zealand Banking Group (ASX: ANZ) has a 15% share of the mortgage market and superior business growth prospects to the other major banks. With a relatively higher exposure to corporate and institutional lending, a reasonable private wealth division and increasing exposure to Asia, ANZ continues to map out a future.
National Australia Bank Ltd. (ASX: NAB) earns a substantial proportion of income through corporate financing and wealth management services. With the UK economy showing concrete signs of improvement, the fully-owned Clydesdale Bank and Yorkshire Bank are likely to make a positive but small contribution to earnings in the near term. NAB's share of housing mortgages is around 16.5%.
Westpac Banking Corp (ASX: WBC) also has exposure to corporate financing and small to medium business. However with 24.8% of the mortgage market this bank's fortunes are largely tied to the health of the domestic consumer and housing markets.
Commonwealth Bank of Australia (ASX: CBA) has a 27% share of the housing mortgage market and also a significant corporate and institutional lending division. It is also an active participant in the wealth management industry. CBA is also very tied into the state of the domestic economy.
Foolish takeaway
All four major banks have been the target of the dividend-seeking cargo cult rampant in recent years. However, investors should be mindful of the historically low impairment charges incurred in 2013 and tightening margins over the short and medium term. In my view all four major banks are overvalued and buyers should beware.
