The share prices of Australia's major banks have jumped sharply higher on Monday morning ahead of the release of the Financial Services Royal Commission final report. Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC) share prices were all up over 1% on Monday afternoon, whilst the Commonwealth Bank of Australia Ltd (ASX: CBA) share price traded marginally lower, up 0.77% at $70.30 per share.
The moves came ahead of the Federal Government's release of Commissioner Kenneth Hayne's final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry at 4:20pm yesterday afternoon.
The 530-page report came with 76 recommendations for improvements across the entire financial services spectrum in Australia, but critically for investors, did not recommend structural separation such as forced divestment of life insurance and/or wealth management. The major target for Commissioner Hayne was the mortgage broking sector, with a recommendation to ban trailing commissions for the banks, whilst many of the other recommendations have already been pre-empted by the major banks.
The banking stocks traded higher on speculation of the report being less hard-hitting than expected, with the potential that Hayne could be "all bark but no bite". Shares in the Big Four banks have been hammered over the past 12 months as revelations of misconduct, regulatory penalties and talk of steep compensation bills have pulled expected future profitability ever-lower.
Australia's largest wealth managers didn't' experience the same positive day on the markets, with both the IOOF Holdings Ltd (ASX: IFL) share price and AMP Limited (ASX: AMP) share price trading 4.50% and 1.34% lower, respectively.
IOOF was hit particularly hard in large part due to expectations of high compensation claims for customers, with investors clearly thinking the measly $10 million expected by IOOF could fall well short of the potentially multi-billion-dollar mark. However, Hayne stopped short of detailing compensation potential and this could see the IOOF share price bounce in coming days.
Foolish Takeaway
Monday afternoon's report could have huge ramifications not only for investors in the banking sector but the Australian economy as a whole. The Financials sector makes up approximately a third of the S&P/ASX200 Index and the Big Four banks make up the vast majority, meaning a damaging report with long-run implications for the banks' operating models could have seen some serious market volatility.
As it happens, I expect that the banks could recover in the short-term, but long-term headwinds to lending growth and net interest margins (NIMs) remain ever-present, meaning I'd be steering away from the banks and into a capital stability stock such as Wesfarmers Ltd (ASX: WES).
