The Big Four banks will be gritting their teeth this morning as they are forced to face off the federal government, which has accepted all but one of the recommendations from the Financial Services Inquiry (FSI).
The recommendations will make life more difficult for the nation's largest mortgage lenders as they imposes tougher restrictions on the sector that are likely to eat into bank profits.
Australia and New Zealand Banking Group (ASX: ANZ) is leading the sector lower with a 1.3% drop to $28.49 in early trade, but Commonwealth Bank of Australia (ASX: CBA) is not far behind with a 0.8% slump to $75.85.
Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB) are faring a little better with a 0.6% and 0.3% loss to $31.15 and $31.87, respectively, but that will bring shareholders little joy as they weigh the impact of the FSI.
One of the biggest threats from the inquiry to bank profits is fees on credit cards with the Turnbull government saying it will adopt plans to restrict the high fees and interest rates on credit card debt.
The recommendation on higher bank capital adequacy ratios is probably less shocking as investors are well prepared for this with the Big Four raising close to $20 billion already to protect themselves from another global financial crisis.
The Big Four will probably need to raise more cash but I think that expectation is largely in their share prices.
These restrictions come at a time when bank profits are under pressure from a slowing residential housing market.
It may not all be bad news though. The move to open superannuation to greater competition may actually hurt industry superfunds more, and industry funds are the arguably the biggest competitive threat to the bank-linked wealth managers.
The government is looking to change the "default" super option for workers who do not choose a specific fund to put their retirement contributions in. Most of the "default" flows go into union controlled industry superannuation funds.
Perhaps the most important question for investors is whether the FSI changes will lead to a cut in bank dividends.
The sustainability of their payouts is already under pressure before today's development that will put their dividends under a darker cloud. I believe the risk to dividends has increased, but this negative outcome isn't a given as the banks are creative in clawing back lost fees and charges.
There could be another winner from today's news. The government will not ban self-managed superannuation funds (SMSF) from using debt to purchase property as the FSI has recommended.
The purchase of investment properties by SMSFs is one of the drivers for the recent house price boom and the news is a boon to stocks related to the housing market, such as online property classifieds company REA Group Limited (ASX: REA) and building materials suppliers like CSR Limited (ASX: CSR).
