Our big banks are turning into mining companies in 2018. I'm not alluding to a change in their business model or an embrace of bitcoin mining, but to capital conservatism that has been a hallmark of the mining sector over the past few years in the face of falling commodity prices.
Welcome the new fiscal conservatives!
Australia's banking oligarchs 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) will be battening down the hatches as their businesses are likely to come under pressure this year.
It's a stark change from only a few years ago when profits from our mining giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) were hammered by the weak outlook for raw materials, which forced their boards to drastically cut spending and curtail expansion to survive a growth famine.
It was the banks that were delivering the growth and winning the affection of investors thanks to our booming housing market and record low interest rates.
But the tables have turned. Commodity prices are holding up far better than what most were expecting while the headwinds are building rapidly for the local banking sector.
This is fuelling speculation in the media today that the Big Four will be cutting 20,000 jobs this year in the face of slowing growth and increasing difficulty in controlling costs.
In another poignant sign of increasing risks in the sector, high profile fund manager Hyperion Asset Management told the Australian Financial Review that it is avoiding Australian banks.
The comments come on the back of a very successful period for the international fund manager which has invested in Facebook and Amazon when they were a fraction of their current prices.
The fund manager is driven by a few simple rules of investing. It looks for companies that can produce five years of revenue growth, have a return on equity of at least 15% and profits that cover the amount they pay in interest by at least four times.
The risks to the banks are on the downside with potential interest rate rises, the risk of rising mortgage defaults due to record levels of household debt and higher capital ratios imposed by regulators, according to the fund manager.
Further, banks are highly leveraged and that makes them more sensitive to any market downturn and the fund manager thinks Australia's economic outlook is subdued, which isn't an environment for high-credit growth that was enjoyed by the banking sector in the 2000s.
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