(16 May 2011 – Australia) A sharp fall in expected returns from a A$73billion expansion in the banking industry’s capital base over the past five years has held back big share gains for the major banks, according to new research.Analysis undertaken for The Weekend Australian, by firm Juno Partners showed that the big four would have to generate top-quartile returns for the next 25 years to justify a 20 percent increase in their share prices.
The analysis found that the market value of every dollar invested in the big four banks has fallen over the past five years.
This was due to a significant decline in the industry’s expected return on equity (ROE) since the global financial crisis.
For example, the market value of A$1 invested in Commonwealth Bank (CBA) fell from more than A$3 in 2007 to less than A$2 last year.
National Australia Bank’s (NAB) reputation as the sector laggard was reinforced, with the market value of a A$1 investment eroding from A$2.25 in 2007 to A$1.25 in 2010.
Part of the fundamental change in investor expectations for the industry’s long-term ROE has been due to global banking reforms. Among other things, they require lenders to build much more substantial — and more expensive — capital buffers, making them less vulnerable to future shocks.
Over the past five years, the four banks have expanded their capital bases by A$73 billion – equivalent to one-quarter of federal government tax revenues in 2011.
Expected returns have also been depressed by higher loan losses and the subdued outlook for credit growth.