The Financial Services Royal Commission has achieved a remarkable feat in its reasonably short history. It's made the extraordinary seem commonplace.
Yes, despite how damning each new piece of evidence has been, the sheer number of serious revelations, allegations and admissions has almost deadened the response. We wearily shake our heads, appalled, but unsurprised, and go back to work. Here we go again.
And it's not just the Royal Commission. In the past week, Australian Prudential Regulatory Authority (APRA), which part-regulates the banks, has released a scathing report (a phrase that, in itself, is approaching cliche, so frequently has it been used) into governance at Commonwealth Bank and the bank admitted that it couldn't be sure what happened to more than 19 million pieces of customer information.
So punch-drunk are investors — and CBA shares are almost 25% lower than their 2015 all-time high — that shares actually managed to rise on the day the bank made the lost-records admission.
Is the market beyond shocked? Is it too optimistic? Or have the likely outcomes already been factored into the share price?
Part of the answer is in the emergency amputations that the banks are currently pursuing. Once upon a time, wealth management business was the answer to the banks' woes: long-term growth provided by strong regulatory tailwinds (more of us putting increasing amounts of money into Superannuation) that was largely uncorrelated — over the long-term, at least — to house prices, which remain the bedrock of bank credit growth, and hence profitability.
That was then.
The first shoe to drop was APRA's decision that, in keeping with a global agreement to fortify the banking sector, Australia's banks should be required to hold more dry powder in reserve, rather than lending it out.
The banks needed to find more capital. Sure, they could cut dividends, but no bank CEO who values his job wants to risk the ire of Australian shareholders by doing that. So it was time to sell the family jewels — something I've argued was akin to sacrificing tomorrow's opportunities for a sugar hit today (can you say 'climate change'?). A cynic might suggest that a bank CEO whose remuneration was tied to this year's profits and share price could be persuaded to give up a lot of tomorrow for a little today. Only a cynic, though.
The second shoe, of course, is the Royal Commission. The tale of woe has been astounding, and, if the Commission has anything to do with it, will have many more chapters before this particular book is finished.
Who'd be in wealth management? Well, who'd be a vertically-integrated advice and funds management business with a complicated and convoluted remuneration structure and that has a — potentially — somewhat conflicted and opaque incentive structure?
Not the banks, that's for sure. ANZ has already jettisoned one such ancillary business. CBA and NAB are either considering or in the process of selling theirs. And not before time.
Meanwhile bank shares are down by around one-fifth from their high points of recent years. CBA alone has shed almost exactly 25% since 2015. A coincidence? You decide. Flattening capital-city house price growth hasn't helped, of course, but the combination of damned if you do (the Royal Commission won't be kind) and damned if you don't (where's the growth going to come from?) makes for a tough story for bank shares.
So, if you're in the market for a large wealth management business, it may well be a buyer's market. But be careful what you wish for — the business models are under threat, and — unless you do a good deal with the seller — there might well be liabilities stemming from the Royal Commission. And let's face it: a buyer can likely set whatever conditions they want, because the banks want out, and as soon as possible.
Foolish takeaway
In the meantime, I still wouldn't be buying bank shares, especially in the shadow of a Royal Commission which could meaningfully fine them as well as impose a change to how they do business. And house prices aren't exactly growing like topsy.
Sure, banks shares look cheap, but then, so did AMP. Enough said.
