Australia’s banks now worth more than Europe’s

By Leith van Onselen

Following on from the Prince’s post earlier in the week, the Atlantic last night published an interesting article that attempts to explain why the market capitalisation of the Australian financial sector – i.e. the total value of securities on issue – is now worth more than the market capitalisation of the eurozone’s financial sector:

A big chunk of this shouldn’t surprise us. European banks loaded up on subprime debt. Australian banks didn’t. European banks made their own bad real estate loans. Australian banks didn’t. And European banks are sitting on top of piles of dodgy sovereign debt. Australian banks aren’t.

But this doesn’t really make sense. It explains why Europe’s financial sector fell much more in 2008 than Australia’s financial sector did, but it doesn’t explain why Europe’s has kept falling and Australia’s hasn’t. The answer, as always, is that it’s about the economy. Commodity exports — thanks, China! — have powered Australia, while the eurozone has self-immolated in a crisis of the common currency. What does that have to do with banks? Well, financial contracts assume that incomes will steadily go up. When incomes — and the economy — do not grow as expected, debts that should not have gone bad go bad.

The claim that Australia’s banks did not engage in risky lending is debateable, given recent revelations of sub-prime mortgage lending in Australia, with more claims likely to come to light should the property market or economy deteriorate from here.

Nevertheless, the Australian economy to date has performed brilliantly when compared next to Europe’s, as shown by the below chart from the Atlantic article, which largely explains the differences between the performance of the various financial sectors:

Australia’s nominal GDP has grown at a healthy rate. Europe’s has not. That simple fact explains why Australia’s banks have rebounded from the financial crisis and Europe’s banks have not. Until or unless Europe gets its nominal GDP back to something close to trend, its financial sector will keep falling behind Australia’s (and everybody else’s).

Now that the China/commodity complex appears to be unravelling, it will be interesting to see whether the Australian financial sector can maintain its lead over Europe’s. Millions of Australian superannuation accounts are certainly relying on it…

UPDATE: in case you were wondering about the first chart, it appears to be showing the Euro Stoxx Banks Index (SX7E), a capitalization-weighted index which includes all EMU countries (so that includes Germany etc) banking sectors. I’ve charted the market cap of it versus the ASX200 Banking sector:

At its height, the SX7E Index had a market cap just over 1 trillion Euro, compared to the AS51 Banx which had a market cap of  290 billion AUD. As you can plainly see on the vertical axis, the market caps have diverged, with the Aussie now in front as the perception is, as spoken in the Atlantic article, that Australian banks are “safe” due to their underlying assets.

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.


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    • ,i>European banks made their own bad real estate loans. Australian banks didn’t.

      I wouldn’t be so hasty to finalise that claim.

  1. Leith have you looked at the balance sheets and assets of all the EU banks to make an analysis comparing them to our banks? On the last graph, no Germany/France/Finland etc.

    I’m not denying a market cap figure, but there’s more to this right? Something is not right here IMO.

    • How about:

      Almost all of Australia’s finance sector is listed, whereas Europe has a lot of financial institutions that are privately owned an therefore don’t appear in this analysis.


      What counts as “financials” differs between the two data sets used.

      What’s really worth noting is that the Atlantic blog post (it’s not an “article”) only quotes Cullen Roche as a source, so it contains nothing new. We still have zero information on the actual data used to make this claim.

      Furthermore, this MB post is an excellent example of the way blogs are just as much an “echo chamber” as the mainstream media. This is a great headline, and it gets a lot of attention, but it means nothing until the underlying facts are examined. That hasn’t happened, which shows how far MB has drifted from its facts-based origins.

          • FACT: As of this morning, market cap of SX7E Euro Stoxx Banks Index is 282billion, market cap of AS51Banx Index is 287billion. I’ll attach the chart to Leith’s post shortly.

            The SX7E includes all the banks from all member states, Germany included.

            If you want to keep commenting on this free blog on analysis you would have to pay for elsewhere, fine… just cut the nonsense about rumors.

            The post’s point is that European banks have gone down in price (market cap) due to the problems with their assets, whilst the perception is our banks are fine because their underlying assets are somehow “superior”.

          • If the market cap of Australia’s banks (population 22 million) is anywhere near that of Europe (population 738 million) there is something VERY, VERY wrong.

            All I can say is there must be an awful lot of privately listed financial institutions in Europe for this to make any sense at all.

            Meanwhile, people are piling into CBA. Go figure.

          • “FACT: As of this morning, market cap of SX7E Euro Stoxx Banks Index is 282billion, market cap of AS51Banx Index is 287billion.”

            SX7E Euro Stoxx Banks Index includes 28 banks. Are they the only listed banks in Europe? And how much of the Eurozone banking sector is unlisted?

        • Macrobusiness – “No nonsense ANALYSIS of the Australian and global economy and the effects on your assets and business”.

          TP: you left out the “free” bit. The Australian, AFR are behind paywall, and Fairfax are moving that way too. We are not behind a paywall. Thanks

    • Ok, so this is just a market cap worth. For the record, Leith/Prince, my question was genuine and not having a go at MB or you guys.

  2. Diogenes the CynicMEMBER

    Just imagine the gnashing of teeth when our banks do return to reality. Wow – our brilliant super funds could “lose” over $200bn. Not only would that have a devastating effect on household wealth with massive knock on effects on consumer spending and ripping a gigantic hole in the Federal budget.

    Of course if China grows forever at 8+% and property prices double every 7 years then Megabank is a strong buy.

  3. tsport100MEMBER

    It’s a win for collusion between government, banks and media in a remote, relatively small market at the ass end of the planet. It’s not that there’s no bubble, for we all well and truly know there is.

    The win is that the ruling class have been so skilful in covering it up and preventing it from bursting! 1) Lock up sub-prime battles in court for years 2) Fraudulently extend delinquent mortgages 3) Sell off sub-primes to the AOFM 4) Keep extending FHB hand-outs to artificially stimulate the ponzi scheme 5) Buy off state level land authorities to slow new land releases 6) Get the Feds to change the law to allow Covered bond sales… the list goes on.

    Yet Mega bank’s ‘real’ credit rating is close to junk while they’re making headlines for reaping record levels of profit…

    How sustainable is one mostly domestic service sector that extracts the equivalent of $1,000 profit from every man, woman and child in Australia every year.

  4. “the market capitalization of the Australian financial sector – i.e. the total value of securities on issue – is now worth more than the market capitalization of the euro-zone financial sector”

    For how long this irrationality and illusion will stand?

    • “Now we have the market cap of the Australian financial sector being valued at more than that of all in Euro zone.”

      Not true. The headline is deceptive.

      • Dunno why you have a been in you’re bonnet about this PhilH. If the market cap of the Australian financial sector is anywhere near that of the Europe there is something VERY, VERY wrong with bank valuations in Australia or Europe or both.

        • The truth matters. Accuracy matters.

          You’re okay being lied to, as long as it conforms to your preconceptions?

          In any case, how the market caps compare one way or the other has simply not been proved.

  5. Interesting comment from Kohler today:

    Commonwealth Bank is the stand-out: it’s the world’s most expensive bank by market value to net assets and yesterday broke $7 billion in profit (still only about a quarter of JP Morgan’s profit).

    And yet everyone is piling into to CBA again today.

  6. Australian banks have around 70%+ of all their loans placed in real estate. Thirty years ago, it would have been around 20%.

    Property here is the most expensive in the world, save the biggest bubble in history, China. When the property market implodes (it has started) here the banks will be smashed.

    • +1

      At least SOME of us can see this clearly. Nice to see someone else joining “the few” who are spreading common sense and light.

  7. Stopped reading, but unable to stop laughing after comment: “European banks made their own bad real estate loans. Australian banks didn’t.”

  8. Reminds of me of a certain north Atlantic fishing island whose banking system rose to prominence in their market capitalisation!

    Just hope we have the balls like Iceland did to force the government to keep their hands off and let it all fall in a heap when it is due….