July 2015 Review & Comments
Written by Tony Gray   
Thursday, 03 September 2015 08:46

After many years of assistance one of our part-time staff, Di Brozek has moved on to another firm with new challenges – we wish her well.  Later this month Di’s replacement, Kristina Jones, is starting in a full-time role with us.  Kristina will cover Di’s duties and also provide input into our reporting and recording systems.  Kristina is relocating from Hobart and has expertise with software and systems that we expect will improve our ‘back office’ capacity.

The Australian Share Market

Turning to markets – the drum we have been beating for some time in relation to the Australian banking system now appears to be resonating more with ‘the market’.

APRA have announced the requirement for the internal risk weighting models used by the big four banks plus Macquarie Bank to lift to at least 25% for home lending by July 2016 (from 16% to 18% for the big four presently).  Macquarie is already ~26% risk weighting.  The consequence is as we expected – rights issues and dividend reinvestment plans are occurring that will result in more shares on issue for the same size business.  While headline profits will not drop from this move, those earnings will need to be shared across more shares on issue.  We consider it highly likely that earnings per share for the major banks are declining.

An earlier measure announced by APRA, but one that is now ‘showing its teeth’, was the requirement that no approved deposit taking institution was to have more than 10% annual growth in lending for investor housing.  The outcome has been for some to stop lending altogether (e.g. AMP’s banking division has stopped all lending for investor properties), increased investor equity (e.g. ING Direct now require a minimum 20% deposit for investor housing loans), and/or increased interest rates (e.g. the big banks have lifted investor house loan interest rates by between 0.27% and 0.29% p.a. – plus removed discount incentives).

The outcome is that the major source of lending growth for the banks has been curtailed.  These measures are prudent – albeit reactionary and well after a massive increase in consumer debt levels (but better late than never).  The secondary risk is that curtailing credit for housing loans (the combined consequence of the APRA capital requirements and the investor loan growth limits) will flow through to reduced housing construction and lead to a downturn for the sector that has been helping offset the economic weakness from the mining and energy sectors.

A third headwind that has emerged for the banking sector relates to bad and doubtful debts.  The decline in bad and doubtful debts was responsible for two-thirds of profit growth last financial year.  Debt provisions were at all-time lows earlier this year, but 1st quarter results for Commonwealth Bank, half-year results for Westpac and just yesterday 3rd quarter results for ANZ all point to rising debt provisions.  Only modestly higher provisions will wipe out any underlying profit growth for the banks – if provisions continue to rise, then headline profit declines across more shares on issue could see reasonably significant declines in earnings per share.

‘The market’ may well be coming to this understanding, in which case share prices will fall further.  Presently they have only dropped due to the short-term risk of rights issues or placement at a discount to current prices.

A cautionary note – I am not suggesting long-term investors should run for the hills and have zero banking sector exposure.  It is however prudent to assess how much of your portfolio is invested in this sector and if some lightening is worthwhile.

There are alternatives, now lower in price than some months ago, that can generate some reasonable income yields.  We will have a clearer idea of risks and return potential as companies report their 2015 financial results throughout August.

I expect some of our mining and energy sector assets, amongst others, will be the subject of takeover activity – due to depressed pricing and the lower $A.  The likes of Santos and Origin must be of interest to their JV partners in light of their massive LNG projects just about to commission.

International Shares

I’m somewhat cautious about the strong consensus that the $A will continue to fall.  Whilst this would be understandable in light of our economic position nationally, I’m always wary once most people (investors) agree on something for long enough.  My feeling is that the majority of currency related gains have occurred in relation to US and UK domiciled shares (the Euro and Yen are weak by comparison).

I remain cautious about the mature bull market in the US – where earnings growth has stalled and interest rates (bond yields) have been rising for 3 years!  There are some non-index international exposures we are still happy to add, which we don’t consider to be urgent action items and we intend covering through regular portfolio reviews.

Deposit Rates

At-call and term deposit rates are truly low from an Australian investor perspective – although still the envy of US, European and Japanese investors!  There is also very little extra premium when going out in time.  This is a very uncomfortable position from a cash-flow perspective.

It is prudent to maintain an exposure though for the defensive characteristics.  If it helps, a dollar of at-call or deposit income today is worth more in terms of Australian shares than 3 or 4 months ago (i.e. each dollar of cash buys more shares and higher income).  Think of at-call funds as ‘opportunity money’ as I suspect we will see lower prices relative to earnings and be able to buy a higher dividend income stream.


At this time of year our focus is on investment markets and reporting.  Make a phone call or send me an email with questions about your portfolio – regular but brief discussions allow me to make recommendations and provide feedback on more portfolios.

If you are concerned that your portfolio is not positioned defensively enough, or conversely feel that you are comfortable applying some excess at-call monies to work, then please make contact.  Otherwise we will continue to progressively review portfolios and be in contact with recommendations.

 Best wishes,


A.W. (Tony) Gray BCom, LLB, Dip FP, GDipAppFin, CFP, FFin

Principal, TG Financial

 Please treat the above comments as General Advice or general information, with no action to occur until we have considered with reference to your financial position, needs and goals.

Last Updated on Thursday, 03 September 2015 08:50

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