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CBA share prices to fall 50% - even without house price crash- Chris Joye

Article key point:

  • While our banks will ultimately have lower credit risks, they will also produce skinnier returns for shareholders. (AMP may cease to exist altogether.) This is one reason why the major banks' market capitalisation multiples of their book values, which in the case of CBA and Westpac rose to a world-beating 3 times, were completely unsustainable. Since 2015 I've explained that as regulatory change and heightened competition forced the majors' returns on equity to approach their circa 10 per cent cost of equity, their price-to-book value multiples must, by definition, approach one. CBA, Westpac and NAB's price-to-book value multiples have since plummeted to 1.6 times today, while ANZ's multiple has fallen to just 1.3 times.

Commsec 23/4/18 reports Price/Book of the big banks as currently as follows: 1.97 CBA, WBC 1.58, ANZ 1.33, NAB 1.48. So the price/book value of these banks were to fall to 1, CBA would need to fall 50%, NAB and WBC would need to fall 33% and ANZ would need to fall 25% - and this is just to bring the price/book value of these banks more into line with international norms. Or to look at this another way, a 50% fall in CBA's share price woul djust bring its share price back to the levels it was at in the early 1990s.

On broader matters that Chris Joye is writing about, he talks about how the Banking Royal Commission is taking a major toll on the big 4 banks and AMP (both share price wise, reputationally and to their business models). Here are some further sections:

  • The Coalition's misguided FoFA changes almost passed through the Senate, which at the last minute rejected them thanks to advocacy by this column and others like it. After the banks and AMP lost the FoFA war, most realised they would never be able to fully harness the planners they had acquired as sales channels. The vision of having the in-house planner push their financial supermarket's platform, deposits, loans, super fund and in-house managed funds, which the internal super fund would allocate to, was dashed.

  • AMP's business model, which is irreversibly predicated on vertical integration, looks fundamentally broken and should be stripped apart and sold off in pieces to maximise the sum of its parts. The CEO's sudden resignation on Friday is but the first domino to fall.

A key flaw in David Murray's otherwise fine Financial System Inquiry was that it failed to address the hazards of vertical integration and conflicted remuneration. The royal commission and Productivity Commission have nevertheless picked up this baton, and will belatedly bequeath us with a much more "narrow" banking system, focused on simpler savings and loans, which we've needed for years. It is precisely the inherent complexity of our big banks that has made them so difficult to properly supervise.

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