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Australian financials are flying

The weekend Murray inquiry has worked out to be a net positive for Australian banks, judging by price action in the market today.

Australian financials
Source: Bloomberg

Financials are flying as the amount of capital the markets speculate will need to be raised seems fairly achievable, and the end result will be a more stable banking sector.

It seems the major banks will need to raise $16 billion in extra capital to achieve the top quartile the Financial Systems Inquiry (FSI) has recommended. The banks can also look to go one step further and push for a 50-basis-point buffer, in which case the level of capital would be $23 billion.

This will be achieved either through a fully underwritten dividend reinvestment plan, mixed with organic growth. Return on equity should not be affected given the likely repricing of gross loans.

It is also worth keeping in mind the government will be receiving responses to the FSI until 31 March 2015 and will ultimately release its final response in mid-2015. It seems logical that this inquiry will fade into the background over the next week or so, but ultimately the investment case of buying yield for income is still very much there and, if anything, seems to be strengthening.

My personal view is that there is a perfect storm for a risk rally into year-end in global markets, with strong jobs data in the US and the ECB potentially about to pull the trigger on government bond buying in January.

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