The big banks just can't seem get back onto firmer ground. Try as they might to leave the bruising Royal Commission process behind them, they are now facing a potential new threat to their market power.
The share prices of 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) are trading around 1% in the red this morning on a news report that called for the potential break-up of the banking oligopoly.
Former Australian Competition and Consumer Commission (ACCC) chair Allan Fels is calling for a break-up provision in our competition law, according to the Australian Financial Review.
The suggestion will give the ACCC the power to force companies to divest assets in extreme cases of market power abuse.
This won't only be limited to the big banks. The change could also see our power generators-cum-retailers AGL Energy Ltd (ASX: AGL) and Origin Energy Ltd (ASX: ORG) split into smaller pieces if the ACCC demanded it.
Fels believes this is better than the ad-hoc way the federal government is approaching the re-regulation of these industries and that bigger stick the ACCC can wield over the market giants will be a more powerful incentive to discourage unethical behaviour.
While big bank stocks have been de-rated and are underperforming the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) this year due to the Banking Royal Commission, the perceived risk of tighter regulations and a falling housing market, I don't believe a break-up scenario has been priced into their share prices.
If Fels' suggestion gets taken more seriously by the government, you can expect another sharp sell-off.
The adoption of the radical suggestion will effectively end the long-established Four-Pillar policy that have essentially enshrined the oligopolistic structure of the banking sector and will introduce a new risk factor on several of our largest blue-chip stocks.
Fels' comments that we cannot just rely on the banks to self-police and the Australian Securities and Investments Commission to protect the public is a belief widely shared by the broader community, particularly given ASIC's poor track record.
It is a difficult time to be a bank investor and I think the task is made more complicated by the fact that using valuation and yield to drive your investment decision doesn't work well in this climate.
To buy bank stocks, I will need to see cheap prices and fat dividends as these metrics will quickly become irrelevant if any of these multiple headwinds become a bigger-than-expected problem for the sector.
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