Business News

Safer banks could hurt your investments

| More

by Peter Switzer

Banks shares could be under pressure today with 27 countries’ central bankers agreeing to new rules over the weekend that will make the world’s financial system safer and less likely to create future GFCs. However, it could make banks less profitable and that could hurt share prices.

The New York Times reported that American banks, which were the prime causes of the GFC have complained about the proposed new rules called Basel III and that’s a fair indication that the new ball game would build safety at the expense of profits.

Tier 1 capital

Australian banks are regarded as some of the safest in the world but these rules could still hurt future profitability. Tier 1 capital is the really safe assets banks hold and this will be set at eight per cent, which is a lot higher than current minimum of two per cent.

And as a boom happens this level could go to 11 per cent or even 16 per cent, which will definitely hurt profits.

“Analysts say that most US institutions already comply with the new rules, but that some European banks will need to raise more money either by holding onto profits that they may have otherwise distributed to shareholders, or by selling new stock,” The New York Times pointed out.

However, these new and improved safer US banks must be post-GFC because it was many of their actions with sub-prime loans that rocked the foundations of the world’s financial system.

Under Basel II, the biggest banks could internally create credit-risk models to work out the capital they had to hold for safety. Clearly, that did not work!

And you wonder why we ended up in a near-depression!

The blue chips

The GFC’s impact has had the likes of Jeremy Grantham, a well-known bear and newsletter writer, say that the US faces seven years of weak growth. How he gets seven is beyond me and looks like a headline attracting guess but he does say the best buys for US investors will be big blue chip companies with a history of paying dividends.

I always like these for cautious, long-term investors and they form the basis of my portfolio. However, as Australia has strong growth links to Asia, our economic growth rates will be stronger and that could mean local investors have more scope for better returns than our US cousins.

That said, the two-speed economy issue will persist and that means some businesses, such as those that don’t do well with a high Aussie dollar, say in local tourism and education, could find their profits and share prices affected.

On Friday in the US

For market watchers, Wall Street went positive again with the Dow was up 47.53 points or 0.46 per cent to 10,462.77 while the S&P 500 also put on 0.46 per cent to finish at 1,109.56. It is also worth noting that the CBOE volatility or fear index is now down to 21.97. Any figure in the teens is good for markets.

This all happened ahead of a big week for US economic data. In fact, on Friday US wholesale inventories went up 1.3 per cent in July, which was better than the 0.5 per cent that the market forecast.

The week ahead

Economic news will bring small business optimism and retail sales on Tuesday. Wednesday has the Empire State manufacturing survey and industrial production figures. On Thursday there’s the important Philly Fed survey and on Friday there will be CPI and consumer sentiment.

Out today will be important Chinese economic data such as retail sales, production, inflation and investment.

On the local front, the NAB business survey on Tuesday and consumer confidence on Wednesday should be the most important economic readings for the week.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer and Paul Rickard the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

Published on: Monday, September 13, 2010