With the Murray Inquiry due to report to Treasurer Joe Hockey next month, it is expected to recommend that the nation’s largest banks be required to hold an additional $25 billion in capital in order to compensate for their “too-big-to-fail” status, and to protect the Australian economy from a potential bank failure.
Despite this pending recommendation, investors continue to buy the shares of Australia’s big four banks. Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB) have all risen around 8%, while Westpac Banking Corp (ASX: WBC) has jumped roughly 8.6% over the last two weeks.
It seems that investors aren’t fully appreciating just how much the new capital requirements could impact the share prices. Not only would it impact the banks’ return on equity, it could also heavily impact their ability to grow or even maintain their current dividend payments. Considering how attracted investors are to the fully franked dividends, such a situation could certainly spark a wide scale sell-off.
However, that’s not the full extent of it. The banks may also sell assets and issue new shares into the market in order to raise the necessary capital, which would have a further impact on the share price. Although many analysts expect the implementation of the new rules would be gradual, shareholders could certainly be in for a few years of staggered growth.
Although their fully franked dividends are certainly appealing, investors ought to avoid Australia’s big four banks for now. Considering the high likelihood of these tougher capital requirements – as well as their limited growth capabilities – they command very high premiums and investors who buy could be committing themselves to years of underperformance.
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