By MoneyMorning.com.au
When the global banking system fails, the whole system will fail.
There won’t be different classes of bank… there won’t be safe banks and unsafe banks… good banks and bad banks… there will just be banks.
And no-one will touch them with a 50-foot barge pole.
In a moment we’ll show you the seven stocks you should sell now… before it’s too late. But first…
We remember a conversation with a client during our broking days. It was autumn 2006. The client said he’d like to buy shares of General Motors and Ford.
His reasoning was the U.S. government would never allow the iconic brands to go bust. And that buying their shares would be an almost guaranteed way to make money.
We agreed with his first point. We couldn’t see any way the U.S. government would allow GM and Ford to go belly-up. But we pointed out that doesn’t mean the government would save shareholders.
We talked the client out of the idea. As it turns out, we were right. Look, we’re not saying we predicted the collapse of GM. Our view was simply based on the fact GM’s numbers stunk.
In 2004 it sold USD$195 billion-worth of cars… and made a profit of just USD$3.5 billion.
In other words, a profit margin of 1.8%! When you think about the capital and operating cost of producing a car, the capital and operating cost of selling a car – and then the three- or five-year warranties they offer – it’s a lot of effort for a crappy return.
The point is, the U.S. government did bail out GM… but that didn’t help shareholders who saw their shares turn to dust. So, could the same happen to the world’s banking system?
Well, it’s already started. And we’d say it’ll only get worse…
This morning, Bloomberg News reports:
“Investors are valuing European banks at levels not seen since the depths of the credit crunch that followed the collapse of Lehman Brothers Holdings Inc. (LEHMQ) as concern over a Greek default and debt contagion escalates.”
And yesterday, the Wall Street Journal wrote:
“France’s largest publicly traded banks face another week of turbulence as Moody’s Investors Service may cut the credit ratings of BNP Paribas SA, Société Générale SA and Crédit Agricole SA because of their exposure to Greek sovereign debt…”
Meanwhile, across the pond, the Financial Times notes:
“Britain’s banks will face an annual bill of as much as £6bn ($9.5bn) to comply with the reforms of the Vickers Commission, according to the panel’s final report…”
And in Australia, our [cough] safe banks still need multi-trillion-dollar taxpayer support. Eric Johnston in the Age writes:
“Global market uncertainty has prompted the Gillard government to extend into next year its promise to stand behind bank and credit union deposits worth up to $1 million, before winding back the insurance scheme that has been in place since the global financial crisis…
“A new permanent cap for the Financial Claims Scheme of $250,000 per person per financial institution will be introduced from February 1 next year. The $1 million cap had been scheduled to expire in October.”
The mainstream argues Australia’s banks are safe. We ask: if that’s true, why do they need taxpayer support?
The mainstream replies it’s because of global banking fears rather than Australia-specific problems. We say, rubbish. It’s because the entire global banking system is built on a business model that’s inherently insolvent… and that includes Australia’s banks.
Still, most mainstream analysts will tell you about Aussie banks’ great yield and captive customer base. But what they won’t tell you is that banking stocks are the ultimate leveraged stock play.
The only way the banks can make money is to issue more loans.
If the banks stop expanding their balance sheets, the result is banking death. As you’ve seen in North America, it doesn’t take much for profits to disappear… or to make depositors want their cash… or to force governments into engineering taxpayer funded bailouts.
As we look at it, bank balance sheets are as bad as GM’s from seven years ago. GM made its crappy profit buying lots of metal, rubber and plastic and then expensively fashioning them into a car it could sell for a small profit.
Australia’s banks (all banks in fact) make their slim profits by convincing ever greater numbers of people to take out ever bigger loans.
That’s right, contrary to the popular view, for the amount of effort required, Aussie bank profits are terrible. Look at ANZ Bank’s [ASX: ANZ] latest numbers:
![ANZ Bank's [ASX: ANZ]](http://www.moneymorning.com.au/images/mm20110912a.jpg)
Assets (loans to customers) of $618.3 billion… yet it only made a profit of $6.3 billion.
That’s a lot of effort. Think of the branch network… the IT systems… the staff… the Aussie housing market… the risk.
Like GM, while credit keeps growing, sure, profits will grow too. But it’s hardly an entrepreneurial business model. It hardly justifies the whacking big pay packages for the banks’ top brass.
Any fool can run a business that relies on expanding credit… especially if you have the privilege of helping create the credit.
This morning, the seven Aussie banking stocks (we haven’t included Suncorp [ASX: SUN] which has moved towards the insurance business) are all down. As we write…
ANZ Bank [ASX: ANZ] is down 2.56%…
Bendigo & Adelaide Bank [ASX: BEN] is down 3.01%…
Bank of Queensland [ASX: BOQ] is down 3.42%…
Commonwealth Bank [ASX: CBA] is down 3.44%…
Macquarie [ASX: MQG] is down 3.91%…
National Australia Bank [ASX: NAB] is down 2.87%…
…and Westpac [ASX: WBC] is down 3.23%.
And we’ll bet they’ll fall further.
Now, we’re not saying you should go out and short-sell these stocks – although Slipstream Trader, Murray Dawes has been short-selling banking stocks all the way through the market mayhem.
But at the very least we see no reason to hold bank shares. Especially if you’re a conservative, low-risk investor. As the numbers above show, in order for ANZ to make a $6.3 billion net profit, it had to build up a loan book of $618 billion.
It’s the equivalent of GM selling USD$195 billion-worth of cars to make a tiny USD$3.5 billion profit.
All up, banks may get another short-term bailout and their shares could go up again. But long term, the business model is corrupt and insolvent. If you’re after safety with your investments, then holding bank stocks is the last thing you should do.
Cheers.
Kris
