Giles Parkinson
Sydney View
Australian bank stocks don't seem to know whether they are coming or going. They were definitely going three weeks ago, when National Australia Bank and ANZ released subdued profit results and the fear of inflation first reared its head in the United States bond market.
Two weeks ago, they were on their way back, helped by the British Treasury's decision to dump much of its gold reserves and a sudden fear from fund managers that they had made a premature punt on the return of the commodity cycle.
Last week, however, bank stocks were going down again - helped by a disappointing interim result from Westpac Bank and confirmation from the US Federal Reserve that the next move in interest rates was likely to be up.
All in all, the past three weeks has seen more than $25 billion worth of stock shunted across the value line, with a final net loss of more than $15 billion from the market cap of the big four banks and a strong message that they may have had their day - or their half a decade.
But have the pessimists hit the underweight button at the wrong time? The bank shares fell because bond prices rose and bank shares are supposed to go down when that happens. But not necessarily: if the trend away from interest income as the primary source of growth continues, then the nexus between bond yields and bank stocks may become as outmoded as the link between gold and inflation.
The increased reliance on non-interest income to generate profit growth was only one of the themes to have emerged from the recent round of profit results. The other was dividend franking.
Westpac's decision to leave its (slightly raised) dividend of 23c a share completely unfranked took the market by surprise, even though it was a one-off decision to await the Government's corporate tax review.
NAB, on the other hand, will be forced to lower the franking on its dividends as it generates more of its profit overseas. In the latest period, 49 per cent of its income came from overseas, and that trend is expected to continue.
Whether that will be a turn-off to the likes of imputation fund managers has yet to be seen, but it is likely to be an issue that has been generating much discussion at board level in the past few months.
The huge success of its proposed National Income Securities that have just been released on the market show how attractive a high return, tax effective instrument is to all investors.
Of course, NAB could easily fix its dividend problem by buying out one of the three other big banks, but it is not allowed. It might be able to tip the dividend franking balance back in its favour should it lodge a successful bid for the Bankers Trust Australia funds management business.
The income securities issue - now worth up to $2 billion - has been interpreted by some in the market as a mechanism for NAB to lift its tier one capital for such a purpose. But BT Australia would also be attractive for the solidity of its fee-generating business and as a quick fix to the NAB's inability to nurture its own funds management business.
Fees have become the buzzword of the financial services industry.
There were $10 billion of them earned in the banking sector in the past year, and more than $7 billion in the funds management sector.
Fee generation now accounts for well over a third of all income for the big banks and has been the biggest generator of profit growth in the past two years.
Of course, one can argue that the apparent increase in fee charges and the shrinking margins is simply a matter of greater transparency and - in terms of profitability - is a case of swings and roundabouts - but fees do have the advantage of being more stable.
Unfortunately for the banks, particularly the NAB, the Government's four pillars policy is also looking quite stable. Treasurer Peter Costello reiterated last week that the level of competition continued to be the key factor in the Government's deliberations on the matter.
• Giles Parkinson is deputy editor of the Australian Financial Review.
