Bank stocks rally after the release of the Banking Royal Commission's interim report

The share prices of our largest financial institutions have surged after the release of the interim report from the Hayne Royal Commission this afternoon. Here's why…

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The share prices of our largest financial institutions have surged after the release of the interim report from the Hayne Royal Commission this afternoon.

The share price of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) rallied between 1% and 2% at the time of writing.

This is the relief rally that bank stock supporters have been waiting for as Commissioner Kenneth Hayne saved his most damning criticism for the market regulator, the Australian Securities and Investments Commission (ASIC).

While the interim report acknowledged that the banks, including AMP Limited (ASX: AMP), have put profits before people, it was highly critical of the inaction from ASIC as the industry's policeman seemed more interested in giving the financial institutions a slap on the wrist instead of taking them to court.

There's no doubt that the banks have acted badly but blaming them is like blaming a spoilt child for bad behaviour instead of looking at the parents for answers.

If you wanted to know where the banks' bad culture has come from, it was nurtured by ASIC as the regulator has too often looked the other way.

There is one thing you can always count on – and that's for people to always act in their own self-interest. This is why we shouldn't be surprised at the banks' bad behaviour and it explains why self-regulation seldom works.

However, the relief rally in the sector may be a little premature (although understandable as the shares of the big four plus AMP have been significantly de-rated) as the interim report made no specific recommendation on how to prevent a repeat of bad behaviour in the sector.

That will come in the final report to be issued next year.

What is likely though are tougher penalties, more stringent compliance for institutions and easier channels for consumers to lodge complaints against these companies.

This means there will be no way for AMP and our banks to escape a lower profit growth environment given that their earnings growth had received a material uplift from unscrupulous and aggressive practices.

This is even before we consider the added compliance cost, class action lawsuits, higher rates for bank funding, increases in bank provisioning and a falling property market that could remain in the doldrums till 2020.

Having said that, the time to buy the banks may not be far off. If the October reporting season is more benign than expected, and the fall in house prices starts to slow, that will be an indicator for me to become more upbeat on the sector.

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Bank Shares

A man sits in contemplation on his sofa looking at his phone as though he has just heard some serious or interesting news.
Bank Shares

Here's when Westpac says the RBA will now cut interest rates

The RBA surprised everyone by keeping rates on hold last week. So, when will the next cut happen?

Read more »

Hand holding Australian dollar (AUD) bills, symbolising ex dividend day. Passive income.
Bank Shares

This is the ASX bank stock with the largest dividend yield right now

Looking to ASX bank stocks for dividend income right now?

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Bank Shares

ASX banking sector: Is it time to consider a regional bank?

The big 4 banks are widely considered to be overvalued.

Read more »

A person leans over to whisper a secret to a colleague during a meeting.
Bank Shares

Here are the latest growth forecasts for the CBA share price

Can the bank continue rising? Here are some expert views.

Read more »

A businessman presents a company annual report in front of a group seated at a table
Bank Shares

Earnings season predictions: Macquarie weighs in on the big 4 banks

What are the broker's predictions?

Read more »

Contented looking man leans back in his chair at his desk and smiles.
Bank Shares

Major CBA investor reveals why he's all in

This investor described one major reason driving his investment in CBA shares.

Read more »

Young investor sits at desk looking happy after discovering Westpac's dividend reinvestment plan
Bank Shares

Invested $10,000 in Westpac shares 2 years ago? Guess how much you've already banked!

Atop their regular dividend payments, Westpac shares have enjoyed a strong two-year run.

Read more »

Woman calculating dividends on calculator and working on a laptop.
Bank Shares

Buying CBA stock today? Here's the dividend yield you'll get

CBA's yield right now might surprise you.

Read more »