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Is it possible to have a stab at quantifying how much damage may be done to the big four banks if APRA/Joe Hockey were to accept David Murray’s recommendation that the banks hold more capital?
I understand there are many variables involved, but as one who is heavily overweight in the big four (and who has been well-served by them), what should a ‘reasonable person’ do?
I note Charlie says buy most of them, including the regionals, ‘on the dips’.
A: As I have said in numerous pieces, it depends on how long the banks are given to comply.
If the transition period is over several years, then the Banks may be able to accommodate any changes by just issuing new shares through DRPs and not neutralizing them. Alternatively, they may be able to sell assets or businesses (like NAB is doing currently in the USA, with its Great Western Bank), to free up capital.
How long is a piece of string? My guess is that the transition will be over several years – and despite the doomsayers – bank shares will not be under that much pressure.
In relation to Charlie’s article, I think he was recommending this strategy for a person who is below or around index weight in bank shares. I doubt he would concur with increasing your exposure if you are already very overweight.
What would a prudent person do? None of us have bullet proof crystal balls – so, if very overweight, I would be looking for opportunities to reduce my weighting closer back towards index weight.
