Great article by Chris Joye:
Welcome to the world of that beautiful $140 billion behemoth, the Commonwealth Bank, which has inverted the axiom that there is a trade-off between risk and return. Years ago I highlighted a perversion embedded at the heart of our financial system: the supposedly lowest (highest) risk banks were producing the highest (lowest) returns. Normally it works the other way around.
…..contrary to some optimistic reports, the capital-raising game has only just begun.
The terrific news for shareholders is that this belated deleveraging will transform the majors into some of the safest banks in the world, which will be able to comfortably withstand a 1991-style recession, exacerbated by a 20 per cent decline in house prices.
In the past I have been critical of APRA’s failure to properly police Australia’s vastly-undercapitalized banking system but must now give them credit for their leadership towards creating a world-class system that will be able to withstand serious endogenous or exogenous economic shocks.
Shareholders face lower returns from reduced leverage but will benefit from improved valuations due to lower risk premiums and stronger, more stable, long-term growth.