Investor exposure to banks spells danger

20-Apr-2017

By Ra’Eesah Lillah

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Households were triply exposed to the banking sector from their term deposits, bank shares and investment properties thanks to the big four banks’ success in dominating investors’ asset allocation through term deposits and loans, according to Rice Warner.

In a recent blog post, the research firm said the investment holdings of most Australians outside of superannuation presented significant risks, with cash and term deposits accounting for 44.3 per cent of personal investments and investment properties 40.6 per cent.

“Despite a backdrop of socioeconomic uncertainty and increased financial market volatility, growth in the personal savings of Australians remains strong,” the firm said.

“However, Australian households are increasingly exposed to significant concentration risk from their holdings of term deposits, bank shares and investment property.”

While Australia’s interest rates had dropped to their lowest level ever, they were expected to rise after the United States economy stabilised and rates increased there.

“Despite the macroeconomic benefits of this environment, rates are widely expected to rise over the next few years,’’ Rice Warner said.

While Australians had attempted to broaden their portfolio by investing in bank shares due to the size of the local banking market and its track record, this had left them with an even larger exposure to an interest rate-sensitive sector.

“The effect of this is that the conventional wisdom of spreading investment funds across several shares will do little to reduce risk if individuals hold too many bank shares and term deposits,” Rice Warner said.

“Given this concentration of risk, it becomes apparent that structural change in these sectors should be implemented with caution and on a holistic basis.”

The government’s proposal to make super available for a down payment on a house could further escalate risks to many investors’ portfolios, it said.

“The combination of dilution of retirement savings and further upward pressure on property prices means such a measure would at best be counterproductive for those whom it is intended to help, and at worst would further increase the risk of the property booms in Sydney and Melbourne ending in tears,” it noted.

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