If you exclude the likes of Afterpay Touch, then the financial sector did not help the wider market in 2019.
If you include them (and no one has crunched the numbers because these ’new’ fintechs’ are in a different classification), they would have lifted the performance of the financial sector, but not the wider market which ended up 18.38%.
With December’s 2% plus fall, the market would have risen closer to 21% if the books had been ruled off at the end of November. The woes of Westpac and weak earnings (and the odd dividend cut) didn’t help investor sentiment.
As a consequence bank shares went backward in the closing months of 2019, led by the shrinking Westpac. That weak performance in the share prices of the big four banks that hit the performance of the sector hard and the wider market in those months, especially the final quarter.
The three RBA cash rate cuts, the continuing fall out from the Hayne royal commission and then the shocking Westpac money laundering scandal all played a role.
That was despite a recovery in house prices late in the year which saw a rise in mortgage demand and sparked investor hopes of another housing boom which in turn would ’save’ the banks and their earnings.
The continuing rise of the fintechs like Afterpay also played a role as it triggered investor concerns about credit growth and new lending (on credit cards) and profit margins which are being pressured (and will continue to be squeezed) by the RBA rate cuts and the rise in compensation provisions (more than $10 billion) in the wake of the royal commission).
The financials sector of the ASX 200 only managed a rise of 8.4% (against the 18.3% rise overall), so that underperformance held back the wider market’s gains for the year.
Financials remain the largest single segment of the Australian market, so their performance in 2020 will be crucial to overall gains or losses.
The CBA saw a 10.3% annual gain in 2019 – the best among the big financials but which was well short of the 18% plus gain for the ASX 200.
NAB shares rose 2.3% and ANZ shares were up a tiny 0.7%. Understandably Westpac shares fell 3.2% over the year – thanks to an 18.4% slump in the final three months of the year.
ANZ shares also lost ground in the final quarter with a loss of 13.5%.
The final six months of 2019 saw all four giants lose value – the CBA’s share price fell 3% (making it the best performed, relatively speaking), the NAB’s shares fell 7.8%, the ANZ’s shares lost 13% but Westpac slumped 15% from July to the end of December.
No wonder the ASX 200 sagged in the second half of the year to be up just over 1%.
Two bank CEOs lost their jobs, followed by the chairs and some directors.
Corporate regulator ASIC started legal action, including against CommInsure for unsolicited phone calls hawking insurance, against ANZ for charging unlawful account fees, and against BOQ and Bendigo and Adelaide over allegations of unfair small business lending terms.
But it was November’s allegations against Westpac by AUSTRAC, the financial intelligence group, that grabbed headlines and triggered a reassessment of the role of banks and their boards and managers.
It was many times the size of similar money laundering allegations against the CBA which cost that bank $700 million in fines and an extra $1 billion capital charge.
The size of the fine against Westpac hasn’t been determined by the financial regulator, APRA, but in announcing an official investigation into the bank and the money laundering claims, doubled the size of the capital charge to $1 billion from the half a billion levied in July on other matters.
The resolution of that matter remains up in the air – and the possibility of charges against Westpac managers is also an option.
For that reason and the headwinds outlined above, especially weak demand from consumers, the RBA rate cuts and margin compression, 2020 is starting out on a very uncertain note for the sector and the performance of the wider market.
Watch for more pressure on interim dividend in the half-year announcements – the Commonwealth starts in February and given the strength of its share prices, investors do not expect a cut.
The ANZ, Westpac and NAB report in late April and May on their March half years and the already reduced dividends are facing further pressure – especially Westpac.
And watch for some possible M&A action with the hoary old tip – a merger between Bank of Queensland and Bendigo and Adelaide, although B0Q is in a weakened state despite its capital raising in late 2019.
