Australian Banks: Floating on An Air of Invincibility

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'My biggest worry is that millions of Australians are expecting money to be waiting for them that won't be there,' says Nick Hubble, your weekend editor and man behind the new Money for Life Letter, which launched earlier this week. If you haven't seen Nick's new film yet, you can check it out here.

We're in agreement with Nick about the current shambolic super system. We think it will let most Australian seniors down. We agree there's more you can do for yourself outside of the system to live a more comfortable life when you retire. And none of it involves the kinds of sacrifices you think it might.

According to Nick, 'You don't have to rob a bank, pour your life savings into the next 'hot' stock, trade in and out of investments, or win the lotto... you don't have to sell your assets or cash in your savings either. You can fund a long, luxury, retirement without selling your stocks or your house.'

That's a big claim - but Nick's a pretty bright guy. See for yourself here.

Speaking of superannuation, that pincer movement we discussed yesterday just 'pinched' a little more. The S&P500 fell sharply again last night, with the sell-off gaining pace into the close. The index closed on its low for the day, which is never a good sign.

Funnily enough, this is very different price action to what happened in the lead-up to the election. Usually, you would see some major buying coming in at the close to push the market up after earlier selling. But we guess with the elections out of the way, the market is free to go about its business and not detract from either candidate's ramblings. Democracy in action.

Weak US markets are also putting pressure on the Aussie exchange, although the ASX200 is just managing to hold above the important technical level of 4448 that Murray identified yesterday. If it breaks decisively through there, look out below. It's the market's magic number. With some of the major Aussie banks trading ex-dividend (and therefore contributing to some of the index fall) the market is actually holding up pretty well.

It will be interesting to see how the Australian banks trade now they have passed on their bi-annual dividend. We reckon many people were purely hanging around for the dividend and will take the money and run for the time being. After all, the economy is slowing. Credit growth is at multi-decade lows. Up until now, the Australian banks have been almost bullet-proof. Up until now, that is...

We continue to marvel at the resiliency of the Australian banking system. Throughout the Annual General Meeting Season, the vibe was that things are tough out there. Margins, revenue and profit are all under pressure. But the Australian banks keep churning out record profits. Profitability, as measured by return on equity, is amongst the best in the world (when compared to other banking sectors).

While the Australian banks may be resilient, they are not immune. Aussie banks are at the core of the economy. And when the economy slows, capital moves from the periphery to the core, giving Aussie banks an air of invincibility. But if the slowdown becomes pronounced, it will eventually infect the core too. We're not at that point yet, but we're approaching it.

Australian Banks are priced for a benign outcome. There will be no 'fat tail' event to derail the banking profit machine. Australian banks are defensive AND offer some growth. Low risk, modest rewards...they're the perfect investment and are at the core of nearly all professionally constructed portfolios.

That's the conventional wisdom, anyway. From a contrarian perspective then, the Australian banks are a screaming sell. We're sorry to say, but this financial crisis isn't finished with us yet. At some point, it will attack the core of the system, and when it does, it will find all those investors hiding in the banks, and it will teach them a lesson.


Greg Canavan for The Daily Reckoning Australia

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