Is it time for a customer banking revolution?

This week in The Money Café, James Kirby and I talk budget leaks, the Banking Royal Commission, the US 10-year bond yield, and question whether it’s time for a customer banking revolution.


Hello, I’m James Kirby, Wealth Editor at The Australian.

And I’m Alan Kohler, publisher of The Constant Investor.

And we are The Money Café.

The Money Café.

And the Money Café has many, many issues to talk and debate this week but perhaps one of the more interesting ones is your birthday, Alan.  Happy birthday, I won’t ask you what age you are.

Well, I went to the café this morning and told them it was my birthday when I ordered a coffee and said to them how old do you think I am.

What did they say?

He said 57, I thought you beauty.

So you were flattered by that, yes.

Well I’m 66.

66, good on you, well for a 66-year-old I’ve got to say you’re moving at quite a speed, and also a grandad, right?

And I’m a grandad which happened on the day after our last Money Café last Thursday, last Friday morning Alfie was born.

Congratulations, and Alfie and you will have a birthday quite close together forever. 

Well, exactly, and he is kind of named after me because my nickname in the family is Alfie.

Well, there you are, little things we didn’t know.

So, there you go.  Alfie is, of course, Alfred.

Of course, on his cert.

Alfred Freeman Mills Manning is his name, which is a name I reckon to conjure with, it’ll get him a long way in life.

He sounds like an internationally famous economist from some time ago.

Well, if that doesn’t get him to be playing cricket for Australia I don’t know what will.

Now, good lord, I mean the Royal Commission, we will talk about it, of course we will folks, and it is quite an extraordinary Commission, it seems to be exceptionally well-run and boy didn’t they hit the jackpot when they went chasing after financial advisers not to mention consumer finance people, and still to come are banks and how they behave with small business.  We’re also going to talk about the budget, you talked about how there was no leaks, Alan, last week well leak number one has appeared this morning.

I thought that was an announcement actually, there you go.  I don’t think they’re leaking it.

Well, in a way they are because the budget is supposed to be when you announce things and they’re announcing it 10 days before so it’s leaked, Alan, it’s just leaked to everyone.

That’s right.

Also, we’re going to talk about how the US 10 year bond yield is at 3% and though that might not sound like the most exciting thing that is actually very significant, that will be our BT Mega Trend of the week.  And, some interesting action on a variety of stocks and some really good questions.  But, first things first, here’s the thing, Alan, tell me this, 66 watching this scene, if you like, all your life.  Are you surprised at how bad the behaviour seems to be across financial services?

Well, no I’m not.

You’re not surprised, you’re not surprised by anything you’ve heard?

Well, no.

What about the extent of it, the sheer institutionalisation of it? 

Well, I mean the specifics, I guess, are surprising.  The fact that the financial planning industry is fundamentally corrupt is not a surprise to me.  I’ve been campaigning against the way the whole industry operates for 15 to 20 years as you know.  I mean we were doing it on Eureka Report.

Yeah, it was part of our proposal, really.

And part of the whole proposition was here’s an alternative to the corrupt financial planning industry.  What I’ve been saying for years is that the problem fundamentally is the percentage fees because basically financial advice, financial wealth management is a utility and it’s actually an essential service.  You’re forced to save for your retirement and therefore you have to invest for your retirement, it’s an essential service, it’s a utility, but it’s the only utility where instead of them sending you a bill you actually give them your money to look after.  Now, I understand why people do that, because they want people to look after their money, it’s too hard, but there you are.  You hand your money over to these people and they clip it.  So, instead of sending you an invoice for their costs…

They shrink your money, they shrink your assets.

They just take the fee off.

Yeah, they slice it back by 1%.

Then there’s the system of fee disclosures which are generally either too hard to read or to find out from it or else people don’t bother.

But, let’s assume that Hayne says okay, percentages are banned, that’s it, you’ve got to rock up and you’ve got to say what the fees are, I mean that’s good, that would be an improvement.  But, it wouldn’t fix things, there’s that whole in-built thing that the planners only recommend what’s on their lists, they don’t go outside that because they’re not insured outside that, that’s a huge problem.  There’s the whole issue of exceptions, they can still take commissions on insurance…

I’m not saying it’s the only problem but I do think that if financial advisors and wealth managers in general were forced to send you an invoice that would fix a lot of the problems.  I think that the fact that now they’re able to just sit back and take the clip and maybe have a cup of tea with you once a year is fundamentally a problem.  I think that if you’ve got a bill that said $10,000 or $5,000 for that cup of tea…

Yeah, you’d react.

You’d go hang on, what’s going on.

Yeah, you would.  But, I wonder, it’s early yet in that we have just had financial advisors and we had consumer finance and banks and small business is yet to come, but I wonder how far will they go.  Because, it is a moment, the government are ready, the government will be accommodating, they’ve changed their tune, they’ve said we’re glad we had this inquiry, they’ve expressed some regret that they didn’t do it sooner and they’ve also hinted that they’d allow him to take as long as he likes, that is Justice Hayne, to complete the inquiry.  But, will they grab the bull by the horns and really tackle the institutionalised corruption and weakness of the framework?

Yeah, I think to a large extent it’s going to be up to the banks as well.  I mean, they’re going to be under a lot of consumer pressure, I think, to clean themselves up.  It’s a bit like the restaurant that gets closed down for having given its customers salmonella, either they are out of business or they have to reopen as the cleanest restaurant in town and get a parade of journalists through to inspect the kitchen.  I mean I think that the banks do have to demonstrably clean themselves up or they will lose customers.

It’s not just customers.  UBS just this morning, the stockbroker, stripped 15% off their target price for Westpac and called it a sell.  Now, I can tell you you can count on one hand the number of times a major broker says that a major bank is a sell as opposed to a hold.  They make the point that the quality of the book is actually diluted.

There’s a thing called the Customer-Owned Bank Association which is basically banks that used to be credit unions and they are all owned by the customers.  I think they have been struggling over the years because the big four have really kind of dominated the market and the marketing power of those big four…

They actually increased their domination, didn’t they, after the GFC.

They did.  But, I reckon if I was a CEO of a customer owned bank this is your moment, you know.

Yeah, get out there.

This is the time to kind of talk about it because they are kind of almost by definition non-corrupt, they don’t have financial planners or they don’t have the problems.

I’d love to agree with you that they’re by definition non-corrupt but…

Well, they’re owned by the customers is all I’m saying.

They are but every structure has its weakness and they have weaknesses too, internal management has to be tested regularly, etcetera, and they don’t have the breadth and facility and complexity of the major banks.

Well, it depends what you want.  If you need a credit card and an ATM facility and so forth, simple banking, home loan, all that stuff…

Yeah, they should be explored and probably should be used much more than they ever were before.  But, that was interesting, Alan, about Westpac, I mean that was the first time I saw where the inquiry deliberations hit the stock price from a recommendation point of view.

Well, UBS has downgraded them, so UBS’s Jonathon Mott I think his name is, the analyst there.

That’s right, Jonathon Mott.

And he has downgraded them and it was because of data released to the Royal Commission concerning liar loans, and which we’ve been talking about.  So, I can’t remember, there’s a proportion, I think 86% of the loans, where they haven’t got actual living expenses of the borrowers and so Jonathon Mott has kind of downgraded Westpac because of that which is interesting.

Yes, if I’ve got it right was he the one who originally brought out the liar loans report, was that UBS?

I can’t remember.

Yeah, well it may have been and at the time it was, of course, seen as a provocative and it was seen as it was isolated to Western Sydney quite literally because that’s where they did the research, well it turns out it’s national.

Yeah, and the data is confirming it.  So, it’s not just kind of these witness statements, the witnesses eating manure sandwiches in the witness box, it’s also data that’s coming out which matters.

Yeah, which really matters.

It’s very interesting.

Which really matters because if a broker changes their numbers, and he’s one of the best banking analysts and one of the top ones in one of the biggest firms, so it’s certainly to be taken seriously. 

So, what do you think, James, of the American bonds hitting 3% which is our BT Financial Services Mega Trend, and it is a mega trend before you answer the question, it is a Mega Trend because the global bond yield or the US bond yield in particular have been falling for 35 years or 38 years or something.

That’s right, and now it’s crept up for three.

Since 1981.  So, it’s been a very long term trend of falling bond yields which have provided this tailwind for equities and now for the past couple of years after it bottomed at 1.36% the US 10 year bond yield has gone above 3%.  So, what’s your take on that?

It’s a signal, a variety of things.  The first thing is that interest rates globally are rising and though we’re in this sort of strange world where the RBA never changes our rate from 1.5 it doesn’t matter in some ways because the banks will pay higher rates so they will charge you higher rates.  So, that’s number one that’s a stress on property.  Number two is there’s a sort of classical textbook principle that once the US bond yield starts to move higher over 3, and certainly once it gets to 3.5 to 4, it puts real stress on equities because money is flowing back into fixed income.  That’s not going to come for a while but it will happen.  The third part is that the Australian bond yield over the same time span, 10 years, has gone under, that is it’s 2.9 or so.  So, the American bond yield is higher than ours.  Now, that actually matters because we’ve been lower than them for a long time and there was the carry trade and all that so it means money could flow back out of Australia to the US.

And it reflects, in fact, that the markets, the global markets’ different views about the Australian economy and the US economy, and obviously markets are much more positive about the US economy than Australia and there’s a sense that the Australian economy is going to remain weaker for longer than America’s.  That’s kind of – I mean, I think implied in your point is that that’s unusual because usually our bond yield is higher than theirs.

Yeah, but for investors I suppose how that’s become a reality that you can witness, if you like, is the ASX going nowhere.  I mean, it’s just going nowhere, it’s 5,800.  I mean, again it took two years to struggle across the line of 6,000 and now it’s fallen back again through it.  So, that would suggest international investors, for instance, are not bullish on our market.

It’s partly because a lot of our stocks, in particular the banks and also the REITs and so on, are priced according to long term interest rates because they’re seen by a lot of investors, if not most investors, as yield plays, they’re bought for their dividend.

Yeah, because the cash rates are so low.

That’s right, and so therefore they’re kind of priced by comparison with long term interest rates and as long term interest rates rise the prices of those stocks, in particular banks, fall.  So, the banks have got a couple of headwinds now, they’ve got the Royal Commission and rising long term interest rates.

They have.  Well, as I say they have so many headwinds that leading brokers are putting the word sell beside them and it’s so rare to see the word sell beside a big four bank in Australia.  So, take it on notice, folks.  Why don’t we talk about some individual stocks, Alan.  I am not across this one at all but I know Healthscope has got a bid today.

Healthscope has got a takeover offer from a new private equity fund called BGH which the BGH stands for Bishop, Gray and Harle, who are two guys.  Harle and Gray used to work for TPG.

Gray is Ben Gray of TPG who did Myer and all that.

Exactly, yeah, so he’s Ben Gray.  So, the BG could be Ben Gray but it’s probably also Robin Bishop who’s the third member of the team, comes from Macquarie.  Now, it’s interesting that Healthscope was bought – I can’t remember when, it was a while ago – it was bought by TPG for $2.7 billion and re-floated four years later for $3.6 billion.  So, that was four years, they made $900 million.

Not the people in the stock but the private equity group.

Private equity, they bought it for 2.7, sold it for 3.6, that’s a 33% gain over four years, thanks very much.  They re-floated the stock, it’s been run now by Gordon Ballantine ex-Telstra and he’s kind of doing okay and the thing is worth $4 billion now on the market.  It’s popped up today as a result of the bid, it was 3.5 and now it’s 4 on the market.

These guys are going to take it.

So, they’re going to buy it again.

And then they’re going to bring it back and float it at 5.

Exactly.

Gee, what a great business.  But, who wins though?

How good is that, fair dinkum.

Yeah, they’re very good at what they do.

So, Healthscope in case you don’t know it’s a series of hospitals mainly and pathology businesses, and the other thing is that it owns a lot of land, it’s got 1.2 billion dollars’ worth of property.

I see, around the hospitals is it?

So, I imagine what the lads will do is unload the property and lease it back, thanks very much.

God.

Leave the future buyers with these long-term leases.

There are some winners there.  Look at the story of iSelect, which I am going segue – a very tightrope type of segue but health comparison, iSelect is a comparison website you may know.  They claim to compare all sorts of things including health insurance.

They started off in health insurance then they broadened, didn’t they?

Yeah, that was their big thing.  They came on and they floated and they were really disappointing when they floated, then they kind of staggered back to passable levels.  Then, what do you know, this week the CEO announces he is resigning and they downgrade their profits by 50% and the stock falls 50% in a day.

Yikes, I didn’t know that.

Yeah.

Bloody hell.

I know.  What can you say?  I mean how can you trust these midcap companies where that sort of thing happens.  They weren’t even shorted, Glaucus didn’t even give them a call and they were down 50% off their own accord.  On top of that the original founder, Damien Waller, has taken all his money out and sold every last bit of stock before all this happened.

Did he just?

Yes, didn’t he just, and some brokers who were acting for him also were supporting this iSelect through the whole thing as a buy.  It’s very smelly and terrible to see, really.

It gives midcaps a bad name.  I think it’s terrible.

Because that’s not a microcap or a small cap, that’s a decent sized company cut in half in an afternoon on one downgrade.  It’s really hard to know.  I mean, if you’re an investor you say how do I protect myself from this sort of thing or do I give up and buy ETFs, I mean how do you steer between these things.  GetSwift, there’s another.

GetSwift are Get Swift.  They came onto the market not six months ago at 70 cents and they went up to $4.

I know, because they made these spectacular announcements that they were linking up with Amazon and everything.

Amazon, that’s right, they went up.

Sprinkled fairy dust on themselves.

So, I looked at the course of sales, so they peaked on December the fourth, right, last year at above $4.  So, I looked through the course of sales and there are a lot of sales above $4, $4.40, $4.30 and so on.  There was one late trade crossing after the close on that day at $6, can you believe it?  It wasn’t many shares, it was like 5,000 shares or something.

Tell people now what it had gone from, it had gone from $1 and a bit, was it?

No, under, 70 cents.

70 cents and it got to 6, someone somewhere bought them at 6.

Anyway, that was never actually recorded but it was a crossing, late crossing at $6.  Anyway, they’re now 43 cents and so they’re a 10 bagger the wrong way.  They were $4.30 four months ago and now they’re 43 cents and today the founder and CEO, Joel McDonald, has joined the ranks of all of the ex-CEOs of which there is a mounting number it has to be said.

Well, as I say, how do you steer your portfolio through these shoals?

Well, what you do is you sell GetSwift at $4, you don’t buy it.

Yeah, I know.  Hindsight is a great thing.

That’s it, it’s easy to say with the benefit of hindsight, and hindsight being the best investor of all, Mr Harry Hindsight.

Yes, well it’s worth putting those two stories on the table.  Healthscope, perhaps someone could make some money out of it if they were timing themselves and aligned themselves with private equity players.  The other two, iSelect and GetSwift, machines to lose money I’m afraid, folks.  It’s one of those weeks.  Okay, let’s have a look at some questions.  Alex says greetings from Sunny Rotterdam – I didn’t know Rotterdam was sunny but I suppose it’s April in Holland.  I was driving around visiting German pork farms this week…

And he sent a picture, did you see the picture, did you see the picture he sent?

No.

He sent a picture of happy German pigs, he did, and they looked so happy.

Soon to be bratwurst – and listening, as always, to The Constant Investor, good on you, and The Money Café via the app.  A friend in Amsterdam just joined ABN AMRO.  To keep up to date he is looking for something similar to The Constant Investor with a European focus.  I doubt there’s anything similar, Alan, but anyway is there anything you could suggest to him?

Well, I must say without wishing to blow our own bags…

Perish the thought!

…we are unique.

Yes, nobody would challenge that.

I did actually spend a few minutes poking around to see if there were any podcasts and there are but they’re all boring.

Right, okay.

Unlike us.

Those ones with the millions of listeners, they’re boring.

They’re really boring.

I find some of them are kind of – not so much boring, routine, yeah.

Yeah.

Okay, well there you are, Alex, we did try to help.

You can have boring ones but you can’t have good ones like ours.

Yeah, sorry, there you go.  That was the answer you were sort of going to get all the time.  Okay, do you want to take the next question?  Sorry to swing that little one towards you.

Well, this is a question of me.  I’m surprised at your commentary about BAF, which is Blue Sky Alternative Access Fund, as though it’s independent of BLA, which is Blue Sky Alternative Investments, it’s not and a fish rots from its head.  Let’s face it, Glaucus was spot on and the BLA share price is moving rapidly to Glaucus’ valuation.  Joe Aston, like a rat up a drain pipe, is maintaining the pressure on BLA and BAF, and then there’s a quote from…

A large slap of Financial Review text which we would be loath to repeat, but nonetheless some good points in there.

My question, what more do you need to know before you dump BAF?  Well, look, I’ve never said that BAF is independent of BLA, of course it’s not, BAF is the listed investment company that invests in BLA unlisted funds, that’s all it does. 

But, you thought one was less worrisome than the other.  I’m just trying to recap.

Well, I’m a small shareholder of BAF.

Yeah, you thought BAF was a little bit better.

Well, yes.

Well, do you still?  Do you still?

The same issues that Glaucus has identified with BLA do not apply to BAF, Glaucus’ research report was specifically about BLA and arguing that its net assets are overstated which obviously has implications for BAF because if BLA’s assets are overstated then so are BAF’s. 

And the stock price has fallen there too but not as hard.

Not as hard, and in fact it seems to have, as BLA keeps falling, as Mark points out which is that it continues to fall towards Glaucus’ valuation, BAF share price has held at around the 80 cent mark which is a 25% discount to stated net assets.  Now, the question, of course, is what the hell are the net assets really.

How accurate is the NTA.

How accurate are they.  There are other problems with BLA.  Whether BLA is every going to be a buy, who knows, I just don’t know.  BAF does have actual assets in it, what are they worth?  They have been signed off by auditors, I don’t know, possibly less than $1.12 which is the stated NTA, but I don’t know.

Alright.  Final question, Greg.  Hi guys, love the show, thank you both.  I am frequently surprised at the advice my retired parents and mother in-law get from their financial planners like buying SYR, that’s Syrah Resources I think, when they are the most shorted stock on the ASX.  Yes, that’s true too, but Syrah didn’t do too badly in the end.  What do you think of XTBs, ACBC XTBs he calls them, as an entry to corporate bonds and what’s the downside?  Surely they take a cut which reduces the yield on the bonds.  Yes, surely they do, they would take a cut, but it’s a business.  But XTBs, they’re not bad.  They would seem to be worth examining, it is a way into the corporate bond market, it’s like a little parcelled up corporate bond play and one of the reasons I think it isn’t getting much attention or isn’t widely known is because it falls outside the world of financial planning that of course has been shown up so badly in the financial inquiry. 

So, XTBs I would certainly say they’re worth examining and they would seem to be, to me at last Greg, worth a look and not a bad thing.  The reason they’re so uninvolved, if you like, is because they don’t get on these approved product lists that financial planners live by.  Unfortunately, even if Hayne makes big recommendations I think it might always be the way.  Okay, that might be it for the week I think, Alan.  We might leave it there for today.  Don’t forget you can subscribe to The Money Café on Apple Podcasts or an app of your choice, when you’re there it’s very helpful if you leave a review because it helps people find the show.  As you know we’ve had 200,000 downloads since we started the show so we’re going the way we want to go.  Also, send in a question and we’ll answer it.  The e-mail is hello@theconstantinvestor.com.  Until next week, I’m James Kirby, Wealth Editor at The Australian.

And I’m Alan Kohler, Publisher of The Constant Investor.

Talk to you soon.