With the banking sector changing under our feet and global trade in slowdown, it should come as little surprise geopolitical tensions are high and shareholders are questioning the longevity of company earnings. Specific to the major banks, we have witnessed one of the strongest and longest periods of loan growth in history which has pushed household debt levels to record highs.

As a general rule, none of this would typically portend to be beneficial for banks in a forward looking context. However, balancing the questionable long-term outlook is a potential tailwind from rising inflation expectations, which have the ability to increase net interest margins and thereby profitability.

The Long-Term Backdrop for Traditional Banking is Ominous

One needs to ask themselves how much scope for future growth is available in the major banks given high existing debt levels. One way to illustrate this is to provide a global perspective, which shows Australian banks growing household lending at a very healthy rate of 6.2% against the headwind of the highest existing debt levels in the world. This lending has increased in importance as it accounts for approximately 60% of total lending – as opposed to commercial lending (data is at 31 October 2016).

This creates a sense of nervousness for people that explicitly focus on the dividend yield and forget about the cash-flow that finances the dividends. It is worth considering how much more leveraged Australian households can get, especially as the average household is getting older.

The secondary consideration is value. Below is an extract from our November 2016 edition showing the valuations of the broad financials index excluding property. We can see the sector appeared modestly overvalued on the metric below, however would need to be balanced with alternative valuation methodologies.




Worried about a property crash? These nine facts answer it better than most…

| Investing Times News, Lifestyle, Recommended by the Investing Times | No Comments
What causes a property market to crash? Is it a falling economy? An unemployment outburst? A building oversupply? Should we concentrate on consumer confidence data? Or is it as simple...

Long-term investment themes: 10 year + view of the trends, opportunities and challenges

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
Drawing attention to the outlook and big themes present in the economy is always a healthy perspective. Below are a number of key themes to think about as you monitor your...

Facts about the Chinese economy: How likely is a financial crisis in China?

| Economy, Investing Times News, Recommended by the Investing Times | No Comments
China is undoubtedly important to the global economy and with embedded signs of rising bad debts, there are enormous concerns surrounding China’s ongoing stability. Since 2005, China has accounted for...

It’s not (totally) the baby boomers fault: Why the working population matters most

| Headline Article, Most Viewed, Recommended by the Investing Times | No Comments

We have an unprecedented rise in the over 65 age group and our working population is growing at a more modest rate. This article will detail the real problems we face and how you can profit from it.

Investing Times Issues



17 stock metrics: value, growth, dividend strength, stability, momentum and sector analysis

| Investing Times News, Most Viewed, Share-Market | No Comments
If we agree the primary objective of stock-picking is to pick the winners and/or avoid the losers, then we must start with a framework that helps determine which companies to...

Could Donald Trump send the USA bankrupt? And why the first challenge is February next year.

| Most Viewed, Politics | No Comments
Donald Trump and economic stability rarely go hand-in-hand. While Trump insists he’ll "make this country rich again", his path to riches has been subjected to four bankruptcy negotiations and his...

Recession risks: what are 10 of the top indicators to watch and why it works.

| Economy, Headline Article, Most Viewed | No Comments
What does it take to identify an impending recession? Obviously, this is an extremely complex question. However, there are at least 10 factors that have had a strong historical track-record...

Can Warren Buffett and Robert Shiller both be wrong at the same time? Unlikely.

| Investing Times News, Most Viewed, Share-Market | No Comments
Warren Buffett and Robert Shiller should be familiar names to anyone with an active interest in the share-market. They are two of the most respected individuals on the planet when...