There are two ways to look at yesterday’s Commonwealth Bank of Australia [ASX: CBA] profit results.
You can see it as confirmation that stocks are expensive and due for a fall.
Or you can see it as confirmation that stocks aren’t expensive because even a record $7.8 billion profit wasn’t enough to send CBA’s share price higher.
But to be honest, we’ve already made our position clear on where the Australian market is right now. It’s at a key level, and you should be prepared to act regardless of whether it goes up or down.
So today, we’ll take Money Morning in a different direction.
As we read through the CBA presentation yesterday, two things stood out. Neither of them had anything to do with the $7.8 billion profit…
One of the things we always look for in a bank’s profit results is the consumer arrears numbers. We’ll be honest, the CBA numbers are reasonably impressive.
That’s especially so when you compare them to the arrears rates for overseas banks during the financial meltdown. Some of the US arrears rates were in double figures.
Paying the Mortgage on Credit?
But then again, those banks went through an almighty financial crash…whereas Australian banks didn’t. So it’s only natural that Aussie consumer arrears rates would be low.
Even so, there’s something interesting about CBA’s arrears rates. Check out the chart below:
Source: Commonwealth Bank of Australia
The blue line is the 90+ days arrears rate for home loans. As you can see, this rate has steadily gone down over the past two years.
Folks would say the improvement in the housing market and lower interest rates have improved things. It’s hard to argue with that view.
But the thing that really stands out is the increase in 90+ days arrears for personal loans and credit cards. In fact the rate for personal loans arrears has increased by 50% in just seven months.
What can explain that?
Well, it’s always dangerous to draw a conclusion without knowing if there is a direct link (causal versus casual). But it makes us wonder. Are cash-strapped borrowers using personal loans and credit cards to pay for mortgage repayments?
It’s not a completely crazy thought. It could suggest borrowers have maxed out on their home loans. Otherwise you’d expect borrowers to use redraw facilities to take cash out of a lower interest rate home loan in order to pay off higher interest rate personal loans and credit cards.
But whatever the reason, it tells you all isn’t well beneath the surface. Aussie households are more heavily in debt than ever before. This hasn’t created a major problem so far, but with the last Aussie recession more than 20 years ago, the Australian economy is living on borrowed time.
When things blow up it will hit the Australian economy hard, and that would be bad news for the banking sector. But as we say, that wasn’t the only thing to catch our eye.
Of more interest to our work in Revolutionary Tech Investor was another feature of the bank’s results…
The Future of Money
In particular, we’re talking about the innovation in the payment and transfer systems.
It’s a theme we covered in depth in the latest issue of Revolutionary Tech Investor. The CBA made a big show of its instant and contactless payments system.
To cut a long story short, our view is that the end is near for coins and notes as a form of money.
The trend has moved away from notes and coins towards credit and debit cards for 30 years. The advent of chip technology on credit cards and ‘tap and go’ transactions is hastening that move.
But could credit cards be in for the chop too? This report from the International Business Times explains:
‘Paypal says the use of physical credit cards will soon die out by 2018, thanks to a rising number of Australians using their smartphones for purchasing almost virtually anything…‘
Think about it. If the only important thing on a credit card is now the computer chip, the rest of the credit card’s ‘real estate’ is pointless.
Not Everyone Understands the Coming Change
Why not just have a key fob containing a chip? Instead of tapping your credit card against the terminal, tap your key fob instead. There’s absolutely no reason why that can’t happen. We agree with Paypal, it will happen. And most likely within the next five years.
But who says it has to be a computer chip? As the folks at Paypal say, maybe smartphones or other electronic devices will be the main payment method.
How about going even further? What about biometrics? This is the idea that you will become the method to transfer money and pay for goods. You won’t have to tap a plastic card, key fob or smartphone…
Instead you’ll press your thumb onto a pad and your unique thumbprint will authorise the payment. Or perhaps facial or retina recognition will be the future way to pay for goods and services.
And if you think this is pie-in-the-sky stuff, check out this from Bloomberg yesterday:
‘As the technology world buzzes with speculation that the next iPhone will have a fingerprint reader, makers of biometric security devices are bracing for a race among smartphone makers to adopt the technology.‘
But not everyone agrees with our fantastical view. The IB Times notes:
‘According to Visa, physical credit cards are considered legitimate currency and recognised globally. Visa Australia Country Manager Vipin Kaira said credit cards will continue to be around for many years and play a significant role in paying for products and services.‘
For Visa’s sake we hope they’re just talking their book in front of the public but developing new products behind the scenes.
Maybe Visa has the same vision for the future we have. The company probably realises if it innovates too much it risks destroying its own brand.
But the bottom line is this is a big picture technology view and it’s destined to happen whether the credit card companies and banks like it or not.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: The Sixth Revolution
Daily Reckoning: When the Paper Gold Market Blows Up
Money Morning: Stocks Could Go Higher, but You Still Need an Exit Plan…
Pursuit of Happiness: The Next Big Leap for Transportation Technology
Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks
