It’s Good to be the Bank

From Dan Denning, an evicted vagabond in the making…

First ANZ, then Westpac, now NAB. It’s good to be an Australian bank these days. “Australia’s largest bank today reported a $4.392 billion net profit for the 2005/06 year, a rise of 10 per cent,” we read in the paper.

If you’re a shareholder in the banks, or an executive, this is great news! If you are paying lots of bank fees, you now understand why running a bank is such a profitable business. Either way, it says something about an economy when the money shufflers are making a mint.

It means a lot of money is being shuffled…and each time it shuffles by, the bank grabs a handful for itself. Maybe just a five dollar not here or there. But you do that a few million times and it starts to add up…to nearly $4.3 billion in NAB’s case.

The big risk to the banks is that the growth opportunities in Australia are limited… to Australia. Business can only borrow so much. Homeowners can only borrow so much. Even with credit, there is a limit to how much of it you can extend before you start making bad loans. But the Treasurer has a brilliant idea…go to China!

“This is going to be, in my view, an enormous opportunity for Australia,” Mr. Costello said. He was speaking of the chance to build a financial services business in China, perhaps even replicate Australia’s superannuation scheme for the hundreds of millions of Chinese who may want to put something away for a rainy day as they get richer and richer.

“To take financial services, superannuation services, to a country with 1.3 billion people with an ageing of the population. It’s a good opportunity,” the Treasurer says. And to be honest, we can’t disagree with him. It seems like a great opportunity.

While we are deeply suspicious of credit-driven wealth accumulation, we are keenly interested in the development of China’s consumer economy. We suspect, in a good way, that while everyone speculates about things that could make China go bust, we ought to prepare for the things that can make it go “boom,” too.

China is rapidly moving to that stage where it will start consuming things as well as producing them. It will still be a customer for all of Australia’s raw materials and resources. But it will become an increasing consumer of finished goods…and financial services as well. After all, the creation of a consumer economy can’t take place without credit. And the Aussie banks are ready to step in….

Still, we’d prefer to keep our eyes firmly on the mining prize. In fact, we may soon hit the road and do our own private tour/diligence expedition of some of the mining and resource stories that interest us most keenly…coal in Queensland…gold mining and alternative energy here in Victoria…uranium in SA and the NT…and of course natural gas and mining in Perth. Hitting the road is a much better way of finding out what’s going on than sitting behind a desk.

Besides, we’ve been given a boot in our backsides by our Landlord. As temporary migrants, we rent. And it turns out that although we just signed a new lease, our land lord is returning from a stint in the Northern Territories ahead of schedule. We’ve been evicted!

We are strangely comforted. We prefer the vagabond lifestyle, we now understand. And if it gets us out to the front lines of the resource market- where Australian supply is meeting Asian demand-then perhaps it is a blessing in disguise. Have a great Melbourne Cup weekend.

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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