Is the Australian banking & finance industry broken?
As a provider of financial services to Australian businesses, Toro is continually focused on how we can improve what we offer and how we deliver services to our clients.
However, as advisors and strategy consultants we recommend that clients step back from the detail of a particular market segment and instead review opportunities and threats in their industry. As an example, we thought we would look at some high-level issues in our own industry – banking & finance.
Our share market is a good example of concentration issues within Australian finance. Australian superannuation is predominantly invested in the ASX 200, but is this index representative of our economy? If we compare the breakdown of Australian industries by contribution to GDP, in the ASX 200 we find financials are 4x over-represented whilst industrials are 3x under-represented.
This concentration issue extends from our equity markets into our debt markets. One concern is the concentration of Australian credit in residential property. RBA statistics reveal that around half of the credit issued by financial institutions in Australia is loaned against residential property (Reserve Bank of Australia, May 2015).
Total real estate loans are even higher when business loans on commercial property are included in the statistics.
In fact, the concentration issue has now spread to the real economy. In a recent report, a consultancy, AlphaBeta, highlighted how our export base has become the narrowest it has been for 50 years. We can see this shift over the past 15 years in the graph below (AlphaBeta, 2015):
What are the implications of concentration?
One impact of this concentration is to increase risk in the economy. When a key industry suffers a structural decline, the implications on Australia’s living standards can be profound.
Unfortunately, Australia is now suffering as a result of the fall in mining income. One measure of living standards, real net national disposable income per capita, is now in decline.
The concentration of our industries and financial resources suggests someone is missing out. The venture capital sector is one such candidate. The AVCAL 2014 yearbook reveals a 2-year, 50% decline in Australian venture capital commitments from A$240m in 2012 to A$120m in 2014.
Curiously this has not translated into a fall in total venture capital investment; it has just shifted commitments from domestic to offshore sources. Foreign venture capital investments accounted from more than half of the total in 2014.
Commitments of capital to Private Equity are not faring any better, with the sector not yet having recovered from the GFC. This is significant because it is one of the most important channels available to diversify sector exposure. Private Equity allows investors to target sectors and businesses with attractive growth prospects which may be the market leaders of tomorrow.
Overall, Toro believes that the banking & finance industry needs to play a more pro-active role in ensuring that capital is:
- Deployed to great businesses,
- Managed by good stewards, and
- Spread across a diverse universe of sectors and opportunities to carry Australia forward in the 21st century.
It’s not all bad news: the Australian banking & finance industry survived the GFC better than most international peers and our superannuation framework creates a vast pool of savings to be invested for our future. So the banking & finance industry isn’t broken, but we believe there is an opportunity to improve the allocation of capital to support Australian businesses.
What is Toro Liberty’s philosophy?
Toro’s philosophy is to identify catalysts for improvement across a range of developing industries, to help growing businesses obtain the capital they require, and to leverage our network to fill capability gaps and capture synergies.
At present, we are working across three industries:
- Automation and robotics,
- Agriculture including ag-tech and agri-infrastructure, and
- Disruptive media and advertising
We look forward to discussing your company’s needs and how our philosophy, experience, and skillset can help you. Please visit www.toroliberty.com/our-team/ to contact a member of our team.