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How a Labor party victory would be bad for bank shareholders

Credit: Thomas Kohler

Are you all politicked-out yet? I know I am – but there’s one big reason for Australian investors to watch the result of this election, and that’s the proposed Royal Commission into Australia’s big banks, as well as the potential changes to negative gearing.

An investigation into Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and Macquarie Group Ltd (ASX: MQG) would have no shortage of material.

In between interest rate scandals, lack of whistle-blower protections, shoddy financial advice and more, there’ll be plenty for a Royal Commission to investigate. Depending on the scope of the inquiry, there’s also potential for examination of the perceived ‘protected status‘ of the big banks, which has reportedly handed them an unfair financial advantage over competitors.

More regulation, higher costs

Any increase in regulation, reporting requirements, or a crackdown on the kinds of activities that banks can engage in would likely lead to lower profits and/or higher costs for Australia’s banks. That could mean lower share prices. In fact, the announcement of a Royal Commission could hurt share prices just on its own.

However, there are two real stages of a Royal Commission, first the investigation and then the subsequent adoption of any changes made. Previous inquiries on a variety of matters have recommended sweeping changes, but very few of the changes have been adopted. In this sense, the likelihood of an actual adverse impact on bank business from a Labor victory is quite low.

Labor is also campaigning to remove negative gearing, which would potentially hurt property prices by minimising the attractiveness of using high debt loads to buy more properties. Needless to say, increased bank regulation and falling property prices wouldn’t be great news for bank shareholders.

It might not be a good time to have a portfolio heavily reliant on the big four banks – but then, that was also true before the election came around. For those without a big interest in the banks, there’s a good chance shares could fall in price, which could bring some buying opportunities. Expect further updates on the banks’ prospects in the coming days and weeks.

Is it worth selling the banks today? 

After a double-digit rally for the ASX since 2016 lows, investors should be on high alert. You'll find a full rundown below of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an "emergency low." Simply click here to uncover these stocks.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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