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BFCSA investigates fraud involving lenders, spruikers and financial planners worldwide.  Full Doc, Low Doc, No Doc loans, Lines of Credit and Buffer loans appear to be normal profit making financial products, however, these loans are set to implode within seven years.  For the past two decades, Ms Brailey, President of BFCSA (Inc), has been a tireless campaigner, championing the cause of older and low income people around the Globe who have fallen victim to banking and finance scams.  She has found that people of all ages are being targeted by Bankers offering faulty lending products. BFCSA warn that anyone who has signed up for one of these financial products, is in grave danger of losing their home.

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BFCSA: Commissioner Hayne Royal Commission spells end of Bank gravy train

Posted by on in ROYAL COMMISSION URGENT
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Hayne royal commission spells end of bank gravy train

Australian Financial ReviewApr 9 2018 11:00 PM

In share price terms, the past 12 months for investors in the big four banks has been tough. The share prices of Commonwealth Bank of Australia, Westpac Banking Corp, ANZ Banking Group and National Australia Bank have declined at least 14 per cent in the year to April 4.

As some of the most popular stocks on the local bourse, the pain has been widespread among individual shareholders, self-managed superannuation funds and large super schemes.

Worse still, the future does not look much better. It's not quite the death of the bank trade, but it looks to be the end of the gravy train that has made millionaires of many mum and dad shareholders (and their SMSFs) since CBA floated almost 27 years ago.

The underperformance is likely to be due to a confluence of factors, not least the financial services royal commission, where widespread evidence of misconduct, fraud, bribery and negligence has emerged.

Although the royal commission cannot impose fines, regulators can, and heavy penalties are one likely outcome. But those are one-off in nature, and water off a duck's back when compared to the almost $8 billion profit produced by Westpac alone in the year to September 2017.

The bigger hit will likely come in the form of sweeping changes to the home loan industry. Third party mortgage brokers  will almost certainly be subject to the much higher regulations and many may even be banned altogether. Brokers, of course, are a key distribution mechanism for the banks' mortgages.

As much as 80% of Australia's $1.7 trillion home mortgage market is made up of "liar loans" that are based on incorrect information. The biggest FRAUD is in the APPROVAL of INTEREST ONLY mortgage loans.  55% of these loans were sold by Bank Managers/officers.

More regulation means additional staff in risk management, and these people don't come cheaply. 

This comes at a time when house prices are already falling, with AMP Capital's Shane Oliver saying that he expects Sydney and Melbourne property prices to fall another 5 per cent or so this year. A report from Morgan Stanley said the prospects for growth in the residential property market were the worst in 30 years.

It's hardly a conducive environment for credit growth, and that's before the banks become more responsible lenders as a result of the royal commission.

UBS modelling suggests under a worst case scenario – where a severe rationing of credit feeds through to the broader economy – it could result in falling house prices and higher unemployment, something that ultimately could turn into a recession, which would be bad news for bank profits. It's no wonder the CBA share price hit a 52-week low.

It's easy to forget now, but in the 1990s recession it is widely accepted that Westpac and ANZ almost went bust. That's how bad recessions can be for bank shares.

There are other headwinds apart from the Hayne royal commission and property prices. Australia has one of highest levels of consumer debt in the world and wages are stagnant.

All this has already been reflected in the bank's most recent results. CBA reported a 1.9 per cent fall in cash profit and rise of just 0.5 per cent in the interim dividend. Westpac fared slightly better, reporting a rise in cash earnings per share of 2 per cent, while keeping its dividend flat.

While the banks might look inexpensive to some – CBA trades on a price to earnings (P/E) ratio of 13 times earnings and a fully franked dividend yield of 6 per cent – when compared to UK banking giant Barclays, they are anything but cheap.

Barclays is one of the giants of the UK banking sector, its assets dwarfing each of the Australian big four banks. Yet, according to S&P Capital IQ, Barclays trades on a price to book value of 0.6 times, a significant discount to CBA's 1.9 times book value.

It might be sobering for the army of SMSFs who hold CBA shares to know the Barclays share price is still down almost 75 per cent from its pre-financial crisis high. In the US, the Citigroup share price is down almost 90 per cent since 2007. When bank shares go wrong, the wealth destruction is devastating.

For bank shareholders – some of whom are the most loyal souls on the planet – the pain of the past 12 months has been eased by the payment of fully franked dividends.

Combined with the prospect of lower levels of profitability and an already high payout ratio, shareholders shouldn't be surprised to see future dividends trimmed. It can be easy to forget that ANZ cut its final 2016 dividend by almost 16 per cent. Its share price has gone virtually nowhere over the past eight years.

Index-hugging and income focused fund managers are likely to be some of the few marginal buyers of bank shares.

True, given our compulsory super system, this will still result in a substantial amount of money being invested in the big four banks. But that won't be enough to change the fundamentals of the bank shares. When no growth meets premium valuations, the best case scenario is a flat share price. The worst case could see bank share prices cut by as much as 40 per cent and dividends slashed or even suspended. 

 

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