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Is The Financial System Paralyzed With Royal Commission Into It?

With the Royal Commission coming into the Australian financial system, the sector seems to be at a risk now with loss of confidence from the community, unless the major players do something to restore their image and probably bring a change in the way the advice is given to the clients. For instance, in the case of AMP Ltd (ASX: AMP), three directors including Vanessa Wallace and Holly Kramer have lost their board seats at the hands of many irate shareholders who have seen a significant value being wiped off the market capitalisation of AMP in the last one month. AustralianSuper, the biggest superannuation scheme in Australia, already made plans to vote against both the re-appointment of three AMP directors and the wealth group's remuneration report at group’s annual shareholder meeting. It is the first time the fund has voted against both the re-election of directors and the remuneration report of a large company, and reflects the depth of the $130 billion scheme's despair at the findings of the Royal Commission into AMP's conduct unveiled so far. There are changes in the top executive positions, where the existing CEO has resigned and a new one is in place. Particularly, David Murray was appointed as the independent Chairman, however, Mr. Murray will only join the company after the Annual General Meeting is held on May 10, 2018.

Other financial stocks like Macquarie Group Limited (ASX: MQG) and Magellan Financial Group Limited (ASX: MFG) listed on Australian stock exchange still could manage the shortcomings in the sector given the recent earnings and/or quarterly updates.

However, all the big four banks have not been sailing so well with the exceptions of Australia and New Zealand Banking Group Ltd (ASX: ANZ) and Westpac Banking Corporation (ASX: WBC) that have performed well with the recent half year results. ANZ rose by 2.8% in last one month while it was down 7.99% in last six months. Similarly, WBC rose up 1% in last five days after being down by 10% in last six months. On the other hand, National Australia Bank Ltd (ASX: NAB) has a mixed interim result but the fundamentals remain strong. NAB’s cash earnings declined by 16.2 per cent to $2,759 Mn in 1HFY18 but revenue advanced a bit with strong liquidity maintained. ANZ’s 2018 half-year results, on the other hand, entailed 14% rise in statutory profit after tax, $3.49b of cash profit (up 4%), 119.4c of cash earnings per share (up 4%) and 80 cents of Interim Dividend per Share Fully Franked. Then, you have WBC’s result for first half year wherein Net Profit after tax rose by 7% to $4,198 Mn in 1HFY18 as compared to prior corresponding period with support from disciplined loan and deposit growth, improved margins and well managed expenses.

Royal Commission and other challenges may force some of the banks to retain dividend yields as such in the near to medium term, but growth might be witnessed in the long run given the intact intrinsic value, and may rise by low to high single digit over the next few years. Overall, sluggishness in business lending and mortgage credit growth, and challenges to interest margins and Royal Commission Investigations may still weigh slightly against the cost management efforts, divestments of non-core assets and shares buy-back. However, it seems that the banks have already factored in the shortcomings and challenges in terms of the fall in share prices in last few months unless there is more negative news flowing from the Royal Commission. In this time, non-banking financial stocks might gain some more traction but an enhanced dividend paying capacity with capability of returning to growth can stay true for the banks albeit at a medium to longer term.

An important aspect to understand here is the concept of vertical integration, which is the extent to which a company owns its upstream suppliers and downstream buyers. The vertical area of the firm is an important point of consideration in corporate strategy, as there is a risk if not seen appropriately leading to a miss to the key issues. Banks are known to have their wealth management businesses as the vertically integrated ones that need to be lensed through the above. Needless to say, regulation into the financial sector is not expected to paralyze it completely, rather end the uncertainties while short-term pain may arise. It is to give a greater assurance to the clients with responsible terms and comprehensive enquiry in the Commission is understood to do the job. The stability of the banking and financial institutions is the main agenda of the Royal commission introduced into the Australian financial system.