Big bank shares could be poised for a relief rally tomorrow now that the much much-anticipated final report from the Banking Royal Commission has been released.
The Hayne Royal Commission's final recommendations to the federal government didn't contain any nasty surprises that could trigger a further de-rating in the sector such as forced separation to split banks or new legislations that could further choke the sector.
The federal government will accept all 76 recommendations made by Commissioner Kenneth Hayne and investors can expect significant changes to the way financial institutions behave – at least over the medium-term.
Mortgage brokers like Mortgage Choice Limited (ASX: MOC) seem worst for wear from the report as Hayne is recommending the removal of trailing commissions and the introduction of best interest test to ensure brokers always puts borrower's interests ahead of anyone else's.
Here are three key takeaways from the release of the final report:
- Relief Rally: I think we will see big banks like the Commonwealth Bank of Australia (ASX: CBA) share price and Westpac Banking Corp (ASX: WBC) share price start to firm or even rally now that the Royal Commission overhang is over.
Bank shares have suffered a big de-rating over the past year and there's a lot of bad news priced into these shares.
Mind you, banks stocks are unlikely to enjoy a short, sharp re-rating recovery as there's still the other issue of slowing credit growth and slumping house prices, but I am feeling more positive about most of the banks. But there are exceptions.
- Royal Commission Losers: One exception is the National Australia Bank Ltd. (ASX: NAB) share price. Commissioner Hayne had singled out the bank's chairman Ken Henry and chief executive Andrew Thorburn.
I can't see how the men can keep their jobs, and as a shareholder I wouldn't want to. But the removal of a chair and CEO will be destabilising for any organisation and that will put pressure on the NAB's share price. I would be avoiding the stock for now but I also would put wealth managers IOOF Holdings Limited (ASX: IFL) and AMP Limited (ASX: AMP) in the same basket.
I want to let more water pass under those bridges before thinking of buying those stocks as they are in a state of structural flux.
- Legal Eagles: Shareholders should also anticipate a big pick-up in legal cases brought against individuals and companies. Commissioner Hayne has recommended 19 instances where corporate regulators ASIC and APRA should investigate across 24 entities.
What's more, our regulators are eager to show that they aren't the toothless tiger that the Royal Commission has painted them to be.
The public is baying for blood, ASIC and APRA have lots to prove and the federal government (whoever that might be after May) won't be throwing any lifelines to financial institutions. Badly behaving executives and companies should be very worried.
