Our banks are suffering from the short-termism of their big shareholders: Gottliebsen

Australian banks and their institutional shareholders are playing a strange game of short-termism.

I have already described how this contributed to the attack by Wayne Swan on the banking system, but it goes much further.

Historically, Australian banks have never ranked high among the top global banks. However, that has now changed, partly due to the high Australian dollar and also because, while most global banks are priced between 1-1.2 times asset backing, Australian banks, like the Commonwealth Bank, are priced around twice asset backing.

Yet CBA’s long-term growth position is threatened by government action.

The most obvious strategy for the CBA board is to buy a well positioned overseas bank at a fraction of the price that Australian banks are currently valued at. Many at the CBA would love to make such a move, but they can’t – Australian institutions would savage the CBA share price if they took such action. It would then make it difficult to raise the money. So it’s not a strategy that CBA could undertake without considerable risk.

Yet it is the right strategy given what is happening in the local market.

You could argue a similar case for Westpac. And while National Australia Bank is in a different situation, once again the institutions are baying for the wrong solution.

The NAB has what has been a comparatively successful banking business in the UK, which has not suffered anywhere near the losses that its rivals have incurred. Previous NAB CEOs have dreamed of giving the bank’s UK operation scale by buying a bank, but the prices have always been too high and the Australian dollar too low.

But now rates are low and the Australian dollar high, so it is much easier to fulfil that long-term dream. However, the institutions say that Europe is on the nose and the NAB would be better out, and so it would seem that the UK operations are for sale for what is a very low price. This is a time to buy, not to sell.

Finally the ANZ was in the prime position to buy the leading bank in Korea but at the last minute it began to have second thoughts about the risks it was taking. They were real risks, any Asian buy would carry similar risks. If the ANZ is going to expand in Asia it is going to have to take risks like those presented in Korea.

But again if the risks were explained to the institutions it would knock down the share price. The ANZ did not walk away from Korea but their hesitancy played a big role in them not crystallising their earlier prime opportunity.

So to appease the institutions all four of Australia’s big banks are not taking the offshore opportunities that are now being presented to them and they are turning their backs on these opportunities at the very time the Australian government is taking steps to lower their margins by commoditising their products.

There is some serious thinking to do at the top of our big four banks, and they should not forget that it is self managed superannuation funds that are their fastest growing share owning category. Unlike the big institutions, self managed funds are looking for good long-term rewards and banks are only going to achieve those rewards if they are prepared to take calculated risks.

This article first appeared on Business Spectator.