Australian big bank share prices have enjoyed strong gains over the last 12 months, with Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) leading the charge, up 38% and 31% respectively.
While Westpac Banking Corp (ASX: WBC) isn't scheduled to give a trading update until May, announcements from ANZ, NAB and Commonwealth Bank of Australia (ASX: CBA) this earnings season have been positive.
- ANZ statutory net profit up 8% for the three months to 31 December 2016
- CBA statutory net profit up 6% for the first half of FY2017
- NAB's 2017 first quarter update declared their bad and doubtful debts charge down 23%
That's solid performance, and it doesn't look like there's an end to their massive, multi-billion-dollar profits on the horizon. Big profits mean big dividends from the banks, and there aren't many that can top NAB's fully-franked 6% yield. As far as income-generating investments go, I think they're a far better option than a term deposit or "high-interest" savings account.
Whilst I quietly cheer on the banks, there will be many others that rue their success. I suspect it has a fair bit to do with mortgage holders observing their loan interest rates changing out of sync with the Reserve Bank. Perfectly understandable, as we humans often find it difficult to look beyond our own self-interest. Property owners aren't the only stakeholders the banks must consider.
The underlying truth is that it is in Australia's best interest to have a robust and profitable banking industry. Between the four of them, the big banks directly employ over 150,000 people. They are crucial to Australia's economic prosperity and have a daily role in most Australians' lives. Not to mention those with Australian superannuation funds will more than likely have an indirect interest in at least one, if not all of the Big Four. If you invest locally in managed funds, listed investment companies or exchange traded funds, chances are bank shares are a proportion of them too.
Certainly, the Australian finance industry has areas it must improve, and I don't doubt there will be further scandals in the future. However, I do believe that for the vast majority the big banks operate within the law and that the media loves headlines of employees caught doing the wrong thing.
It certainly could be a lot worse.
Our banks are some of the best operated and regulated in the world. Compare recent records with banks in Iceland, Spain, Italy, or Britain (this is by no means an exhaustive list). Some U.S. banks played a large part in causing the Global Financial Crisis – problems with Australian banks pale in comparison. I'm not saying they're perfect, but all things considered, our banks do a pretty decent job.
Some will point to inflated housing prices or the fact that Australia is overdue for a recession as reasons not to invest in the banks. I share these concerns as it's true that the banks will be hard hit in any form of significant economic downturn. I'm somewhat sceptical on the Australian housing bubble though as it appears the current federal government and RBA are doing whatever they can to prevent it from bursting.
Even if/when there is a housing market crash (or recession, etc), there will be a recovery. Just like there was after the GFC and every other economic disaster in a developed country before that. As long as time is on your side, a crisis will often present great buying opportunities for investors.
I'm not expecting amazing year-on-year growth from my bank shares, but I do expect them to still be making big profits when I retire. There will be ups and downs along the way, and I'm not a buyer at current share prices, but I will keep reinvesting dividends for the next few decades in the belief that my retirement will be much better for it.
