In my recent Market Perspectives piece, I explain why I believe the CASSH countries – Canada, Australia, Singapore, Switzerland and Hong Kong – are likely to grow faster next year than their larger developed market counterparts. One reason I cite for the CASSH countries’ more robust growth: They exited the recent credit bubble with stronger banking systems.
You may be wondering why the banking sectors of CASSH countries would be stronger than those of other developed markets. A Financial Times “Lex” column from earlier this month, “Aussie banks: she’ll be right, mate,” credits Australia’s government for the strength of that country’s current banking sector and explains how Australia’s banking regulation has “helped the domestic economy steer clear of recession for 20 years.”
In the 1990s, the Australian government adopted what’s called the “Four Pillars” policy, which prohibits the four big Australian banks from merging or acquiring each other. So even before the recent banking crises, the Lex column explains that the banks had little incentive to do “anything dangerous in pursuit of size or earnings per share.” As a result, they now don’t have much exposure to problematic European debt.
Meanwhile, since the credit bubble burst in the United States and the European sovereign debt crisis began, the column notes that Australian banks have been able to learn from the mistakes of their Western counterparts. They’ve adapted their funding and liquidity policies to boost deposits and liquid assets, and strengthen their balance sheets.
In my opinion, all else being equal, Australia’s relatively healthy banking sector should lower the discount rate that investors apply to Australian corporate earnings and result in a higher multiple for the Australian market.
Still, investors should keep in mind that while they are currently strong and sound, Australia’s banks are large relative to the size of its overall economy. During the lead-up to the financial crisis, similarly large banking sectors were problematic in many countries, and this does introduce an additional risk that investors should remain aware of.