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Royal commission: should shareholders be worried?

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Like them or loathe them, our big banks have an impressive track record as a solid investment. But could the banking royal commission leave the banks – and their shareholders – nursing financial wounds?

Even if you don’t own shares in the banks, it’s highly likely your super fund does, so the banking royal commission, announced in November, has the potential to impact the wealth of all Australians.

It’s no secret the big banks have been the darling of investors for years, and with good reason, often notching up decent capital gains and always providing strong (and fully franked) dividends.

The nation’s largest bank for instance, the Commonwealth Bank, has seen its share price rise from $53 to $80 over the past decade, a period that includes the global financial crisis (GFC). And all four major banks have delivered dividend yields in excess of 5.0% – NAB being the stand out with a yield of 6.67%.

Putting us out of step with the global economy

If there’s one thing sharemarkets dislike it’s surprises, and that certainly isn’t the case with the banking royal commission.

Shane Oliver, head of investment strategy and chief economist, AMP Capital, says, “The possibility of a banking royal commission has been talked about for so long it didn’t come as too much of a surprise. ”

However, he believes it has the potential to put our financial sector out of step with the rest of the world, occurring as it does at a time when the Trump administration is pushing for a reduced regulatory burden in the US, and Europe’s banks are “looking more attractive” as a result of economic recovery.

“While Australia’s banks have outperformed their overseas counterparts for much of the period since the GFC, the royal commission puts a cloud over this as it brings the potential for more regulation,” says Oliver.

More regulation could stifle lending

In fact, regulations in the financial sector have already tightened dramatically, the result of multiple investigations over recent years including the extensive Financial System Inquiry of 2014.

“The risk is that any further regulations are too heavy-handed,” notes Oliver. If that happens, the banks may become too cautious with lending, and Oliver says the fallout could impact the broader economy. Not surprisingly, he believes there is an argument for less regulation not more.

Uncertainly about the terms of reference

Andrew Dunbar, director and senior financial planner at Apt Wealth Partners, is doubtful that the royal commission will impact the fundamentals of the banking, superannuation and financial planning sector. Though like many commentators, he says the exact look and feel of the royal commission is yet to be determined.

Oliver agrees, saying, “Ultimately, there are lots of question marks, and it’s unclear if the royal commission will uncover anything that hasn’t already been addressed in the Financial System Inquiry or the other inquiries since the GFC. ”

The trump card for bank shares

Anxious shareholders can take heart knowing the banks do have a trump card up their sleeve – their track record for paying good dividends. “This should put a floor under any share price weakness,” says Oliver.

Dunbar takes a similar view, noting, “Australian banks remain well-capitalised and are a strong yield producing sector. Accordingly, we are not recommending any changes in our client portfolios regarding their exposure to Australian banks. ”

The bottom line is that it’s very much a case of watch this space. But with a reporting date of February 2019 for the commission’s findings, it’s hard to see a compelling reason to offload your bank shares at this early stage.

RELATED: Five things you should know about the royal commission into banks

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