Big threat facing your bank shares

Not unexpectedly, speculation arising from the Murray Financial System Inquiry about substantial increases in the capital reserve requirements for our banks has unsettled both domestic and overseas share investors. Market confidence hasn't been helped by official warnings to the major banks to tone down their lobbying against the need for change. One thing's certain. The sooner decisions are made and acted on, the lesser the impact will be on the value of the savings of the millions of Australians owning bank shares directly or through their superannuation funds.

The basic problem for Australian share investors is the very high weighting of the banks and major resource companies in our major share indexes and in most portfolios. With the resource sector of the market likely to face challenging times because of falling commodity prices, individual investors and the sharemarket generally won't be helped by drastic changes which impact adversely on banking share prices.

Investors still remember their losses when the global financial crisis forced all our major banks to issue new capital at distressed prices. Even if the inquiry recommends a major increase in bank capital reserves, its implementation needs to be phased in over time. One possible way to achieve this without forcing the banks to make discounted new equity raisings that disadvantage smaller existing investors is to require all future dividend payments to be accompanied by an underwritten Dividend Reinvest Plan.

This option gives current shareholders the choice of whether to reinvest their half yearly dividends and if they don't they do not lose out because all new shares taken up by the underwriters will still be issued at a price close to the current share price.

Changes which force the banks to reduce their dividend payouts would have a more serious impact on share prices and returns by reducing their attractiveness to yield-conscious investors. The larger the new capital raisings imposed on the banks via forced reductions in dividend payouts or large new issues, the more serious the impact on share prices is likely to be.

Before blindly implementing the inquiry's recommendations, the government needs also to analyse other changes that could help improve the stability of the financial system. For example, consider the US tax arrangements for home buyers. Their tax system assists home buyers to service their mortgage while providing no subsidies to geared investments.

Negative gearing is an arrangement peculiar to this country where the dice are loaded in favour of investors via the unlimited tax deductions for investment losses. The housing bubble might be better addressed by limiting the tax subsidies provided to investors, thereby reducing the upward pressure on property prices.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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