The recent failure and bailouts of global banks such as Home Capital Group Inc (Canada), Banco Popular (Spain), Banco Popolare de Vicenza (Italy), and Veneto Banca (Italy) has cast new light on Australian banks and those who invest in them.
Think about our Big 4 banks – Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ), and National Australia Bank Ltd. (ASX: NAB).
In the grand scheme of things, what is the likelihood that, of all the banks in the world, these four banks of ours are the safest, best managed, and best regulated banks in the world?
I'm not asserting that they are these things, but look at their record. Asides from some comparatively minor issues during the GFC, they've had a heck of a long run without any crises.
Are they so well-regulated that they can't get possibly get into trouble?
Regulatory conditions have been tightening recently and it is possible that the banks would find it very difficult to blow themselves up. However, if you look at the many issues of conflicted incentives (financial planning scandals, life insurance scandals, interest rate rigging and so on), our banks have found plenty of trouble over the past decade.
Is the quality of their management and their business so good that they can't get into trouble?
Our banks do enjoy something of a monopoly market with favourable competitive advantages, however this could be offset by their exposure, which is skewed towards residential property and commodity businesses.
As to management, our banks are among the most profitable in the world and they attract quality staff. It is quite possible that they are the best in the world. From a purely statistical perspective however, I find it unlikely that the execs at all 4 banks are so highly skilled as to be in the top ~1% of bankers globally.
Are their finances so good that they can't possibly get into trouble?
There are a few things to take into account here such as the price of the shares relative to the business (e.g. the price to book ratio), the loss ratio on loans, the % of loans financed via domestic deposits, and so on. In most cases, Aussie banks look stretched compared to overseas peers. What's more, Aussie banks are at least partly dependent on overseas banks for financing.
Neither their share prices nor their financial situation are so good that they can't get into trouble.
Are our banks so ethical that they don't engage in the type of behaviour that could lead to problems?
I hear sniggers from cynical readers and I can assure you that they are not.
I have painted broad strokes here, but a consideration of all of these factors suggests that the success and lack of risk at our banks over the past 2 decades has actually come from external factors such as a strong economy and falling interest rates. Which raises a far more important question:
Are the big banks lucky, or good?
Food for thought.
