The share prices of Australia's major banks have charged higher today following the release of the Financial Services Royal Commission final report yesterday afternoon.
Shares in Australia's "Big Four" banks all closed significantly higher, led by the Westpac Banking Corporation Ltd (ASX: WBC) share price which surged 7.36% to $26.70 at market close. Australia and New Zealand Banking Group Ltd (ASX: ANZ), Commonwealth Bank of Australia Ltd (ASX: CBA) and National Australia Bank Ltd (ASX: NAB) weren't far behind with their share prices increasing 6.50%, 4.69% and 3.91%, respectively.
The moves come after the release of Kenneth Hayne's final report from the Royal Commission, which many expected to have significant ramifications for the future of Australian banking. As it turns out, it's not that bad for the banks.
Whilst Commissioner Hayne was scathing of the financial services industry, and many of the senior leaders within it, the actual financial impact of the report for the banks is minimal. Mortgage brokers have been hit hard on the ASX today as Hayne took aim at trailing commissions, whilst regulators ASIC and APRA didn't escape his fire either.
So why will today's banking bonanza be short-lived?
Clearly, the market had priced in worse ramifications from the report, including the potential for "structural separation" in the sector, meaning the forced divestment of particular divisions within the banks. But I think today's price rebound will be what's known as a "dead cat bounce", as I expect shares to continue to decline in coming months.
The biggest driver for the banks is lending volume, and there's no doubt that hampering the mortgage broking industry will hinder that, with ~60% of all bank mortgages coming through brokers. Whilst it can be argued that these funds will now be channelled directly to the major banks through direct loans, the bigger issue facing the banks (and their share prices) is slowing credit growth in Australia.
With no real growth drivers in sight, the potential for higher rates and a declining property market, the outlook for the banks isn't great. Yes, the report was a great outcome for the banks in terms of getting off lightly, but the bigger picture is that rising housing defaults and lower profitability should see them fall in coming months as they report earnings – starting with the Commonwealth Bank tomorrow morning.
Foolish Takeaway
Personally, I'd be steering clear of Financials for now despite the final report implications and wait for the softer earnings results to be priced back into major bank share prices. For those looking for capital stability, I think Wesfarmers Ltd (ASX: WES) could be a good option ahead of the Australian mid-year reporting season.
