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Wait, what? Market value of the big four banks surged $20bn after the Royal Commission’s final report

From left to right: NAB CEO Andrew Thorburn; CBA CEO Matt Comyn; Westpac CEO Brian Hartzer; and ANZ CEO Shayne Elliott. <em>(Photos: Getty)</em>
From left to right: NAB CEO Andrew Thorburn; CBA CEO Matt Comyn; Westpac CEO Brian Hartzer; and ANZ CEO Shayne Elliott. (Photos: Getty)

The final report into the banking Royal Commission has done little to dampen investor interest in the Big Four banks.

In fact – the exact opposite has happened.

Yesterday, Westpac, ANZ, Commonwealth Bank and NAB stocks all surged higher, rising 7.36 per cent, 6.5 per cent, 4.69 per cent and 3.91 per cent respectively.

The rally added about $20 billion to the market value of the big four banks, and helped push the ASX200 Financials index to its biggest gain since March 2009.

The benchmark S&P/ASX200 Index climbed 1.95 percent – its best day in 26 months.

And it’s all off the back of the 76 recommendations that addressed the culture of misconduct, but stopped short of major structural change.

Meanwhile, mortgage broking companies were being hammered after the government proposed banning trailing commissions and reviewing broker remuneration in response to the commission’s report.

Mortgage Choice closing down at a whopping 25.24 per cent and AFG was down 29.13 per cent on Tuesday.

“It’s a clear win for the banks”

The rise is something of a ‘relief rally’ that the penalties weren’t worse for the banks.

“The soft recommendations of the Royal Commission final report is a clear win for the banks,” UBS Group AG analysts led by Jonathan Mott wrote in a note.

“We do not believe that any of the 76 recommendations by themselves will have a material financial impact on the banks.”

Essentially, the market was expecting much worse, and investors who ditched bank stocks before the report were buying back their shares, pushing prices higher.

CommSec market analyst James Tao said the market was relieved to know what banking royal commissioner Kenneth Hayne was recommending.

“Even though they were quite harsh and scathing on the deficiencies and culture of the banks and the financial sector as a whole, they didn’t come out with anything as to breaking up the banks.

“It definitely has been a solid session, the gains have been across the board.”

In his 1,000-page report, Hayne lambasted senior bank executives, said the fees-for-no service scandals could lead to criminal charges, and urged the securities regulator to get tough and start considering prosecution rather than negotiation as its first step.

But he steered clear of recommending financial firms be forced to split off financial advice and wealth management units to avoid the conflicts of interest that were at the heart of much of the wrongdoing.

“Enforced separation of product and advice would be a very large step to take,’’ Hayne wrote. “It would be both costly and disruptive. I am not persuaded that it is necessary to mandate structural separation between products and advice.’’

That’s a boon for wealth managers AMP Ltd. and IOOF Holdings Ltd., which suffered some of the biggest reputational and share price damage during the inquiry. Both companies rallied Tuesday, with AMP gaining 10 percent, and IOOF jumping 8 percent.

“The report is not as stringent as people might have expected,” said Eleanor Creagh, Sydney-based Australian market strategist at Saxo Capital Markets. “I don’t think that the Royal Commission did anywhere near enough to cover what’s needed there.”

In another win for banks, no changes will be made to responsible lending laws, such as enforcing closer scrutiny of a borrower’s spending habits.

UBS had estimated that a move to full expense verification by banks could reduce maximum borrowing capacity by about 30 percent, creating a further drag on the property market. Prime Minister Scott Morrison had also warned that tighter lending rules could have triggered an economically damaging credit freeze.

The government said it would act on all 76 recommendations, including setting up a new body to discipline errant financial advisers and creating an independent panel to ensure regulators do their job.

Is this a ‘dead cat bounce’?

Motley Fool’s Lachlan Hall is doubtful that the banks’ share price ‘bonanza’ would last long.

The price rebound may just be a ‘dead cat bounce’, with shares expected to continue declining over the coming months.

These are the headwinds the banks still face:

  • House prices are still falling

  • Customer remediation is still ongoing

  • Class actions are still being formed

  • Politicians will want to prove they are taking action, so it could be a “who can punish the banks” competition leading up to the election

  • Tighter lending standards remain, enforced by APRA, ASIC and the new body

  • Banks are required to hold more capital to be unquestionably safe

—with wires

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