Banks still worthy of a place in most portfolios

Clarke McEwan Accountants

Australian banks still worthy of a place in most portfolios… despite what some commentators say

Barring disasters, the banks should produce returns of the order of 10% per annum over the next decade. With a yield of 8% including franking credits, we need just 2% per annum growth to get us to a 10% per annum total return. Even if we get no growth in earnings, an 8% per annum return means that banks will be worth a place in most portfolios - barring disasters.

Disasters? What could possibly go wrong?

Anyone who follows the mainstream investment media will have no problem making some suggestions here. Ever increasing capital requirements, curbs on lending growth, new taxes, fines, Royal Commissions and other government interventions have been widely discussed. In addition, some outright disasters have been suggested, with a collapse in the residential property market the most common. And, of course, there is the possibility of an old fashioned, severe recession which inevitably would bring more pain for the banks.

Some of these scenarios are likely and should be factored into any forecast. Others may be unlikely but still are risks that we need to consider. Here, we want to put those risks in perspective particularly those that have been widely covered in the mainstream investment media and where we believe the impacts have been vastly overstated.

Increased regulatory and capital requirements

These are real and are happening right now and, accordingly, are in our base forecast. Most banks have around 10% of capital for each dollar of risk weighted assets – that should head towards 11% over time. This makes the banks safer but slightly less profitable. In addition, we have the bank levy which should slice around 2.5% off bank profits. Furthermore, we have threats of Royal Commissions, fines for bad behaviour, and so on. Collectively, we think these will reduce Earnings Per Share by about 10% over time. This slices just 1% per annum off returns over the next ten years. We include this impact in our forecast.

A slowdown in the growth of residential lending

We think this is highly likely and it is why we forecast future earnings growth at around 2% per annum. This is much lower than historical earnings growth and, in fact, this forecast is much lower than most other analysts' forecasts. And still it gets us to a 10% per annum return.

A recession is likely in the next decade and will hurt the banks

Our forecasts assume that Australia will experience a recession in the next decade. We also predict that, when the recession comes, the market will know about it before we do – and so the chances of getting out early will be small. Hence, the key question is how bad a recession might be, both in terms of depth and also in terms of how well prepared the banks are for that recession.

The depth of a recession is often depends upon the health of the banks to that recession. The more extended the banks, the more they cut lending, the more they harass existing borrowers, and the more they drive the economy into the ground. When banks enter a recession in better shape, the recession is generally milder. We saw that during the GFC where the Australian downturn was much milder than in other parts of the world because, at least in part, the Australian banks entered the recession in reasonable shape.

A 2015 RBA study found that the key drivers of bank lending losses during recessions were: rapid credit growth; high levels of building construction activity; falling bank lending standards; and, rising interest rates.

Today, we have modest levels of lending growth, normal levels of commercial building construction, tightening lending standards and no sign of a central bank with any interest in raising interest rates. Of those four loss drivers, the only one flashing a warning light right now is the high level of residential construction activity. Even there, the banks are scaling back their involvement and watching their risks very closely. In short, the banks are in good shape generally and in much better shape than prior to the GFC. This suggests that any recession in the next decade should be relatively mild so long as these indicators remain strong. If they turn south, caution will be required.

Our forecast assumes that a mild recession will occur and will result in a one-off reduction in profits of around a third and take around 0.5% per annum off 10-year returns.

Even mild recessions will cause short-term volatility

But before we get too comfortable, we should not forget that during a recession, bank share prices will probably fall by 50% or more. But the fall is unlikely to be permanent.

While this may seem dramatic, we would say the same thing about every other sector of the share market. All equities are volatile. All can fall dramatically during recessions. The banks are no different. As long-term investors, we should worry predominantly about a permanent loss of capital.

And that is a possibility if the recession is severe. Accordingly, no matter how attractive the prospects of Australian banks, all the normal rules of diversification still apply.

Impact of a collapse in the housing market

Now, this is where things hot up. The market is divided on this issue. There are those who consider that a collapse in housing prices and as a result, the banks, is almost certain; there are those who aren't sure; and, there are those who are extremely sceptical that we will see a housing induced collapse in the banks at all.

Farrelly's considers a collapse in housing prices as possible but unlikely:

We still seem to have a shortage of housing that not even the residential building boom is meeting;
Bank lending practices are being tightened but not sufficiently to cause an out-and-out collapse.

Nonetheless, it would be foolish to say that a collapse in housing prices couldn't happen. Accordingly, we consider the impact of an extreme example - a 35% fall in the prices of houses nationwide and an accompanying recession that sees soaring unemployment and a 10% default rate amongst mortgagees.

Helpfully, the major banks produce detailed reports showing the Loan to Valuation Ratios (LVRs) of their mortgage lending books. This is all we need to do our own stress test. Consider two loans, one has a LVR of 50% (in other words, $50 worth of loan for every $100 worth of house), while the other has an LVR of 90% ($90 worth of loan for every $100 worth of house.) Now assume that property prices fell by 35%.

Post the fall, the first loan now has $50 worth of loan for $65 worth of house, while the second has $90 of loan for every $65 worth of house. If the first borrower loses their job and can't repay the loan, the bank has the option of putting the property on the market, recouping their $50 loan and sending whatever is left back to the unfortunate borrower.

The second borrower would be a problem for the bank. Here, a default potentially costs the bank a loss of $25 for every $90 of loan.

Now let's assume that 10% of all mortgages default. The results for the major banks are shown in Figure 1 on the following page.

Figure 1: Bank stress test (35% downturn in property prices & 10% default rate)
	ANZ	CBA	NAB	WBC
Size of loan book ($ bill)	274	436	285	414
Loss as a % of loan book if 10% default	-0.5%	-0.6%	-0.6%	-0.4%
Loss In $mill	-1,479	-2,660	-1,807	-1,482
Loss as a % of 2017 pre-tax profits	-15%	-19%	-19%	-13%
Pre-tax profits 2017 ($mill)	9,704	14,114	9,306	11,050
Source: Bank reports, farrelly's analysis

That's right. A perfect storm of a 35% fall in residential property prices and a 10% default rate would result in the banks' profits falling by about 17% on average. While this is clearly not a great result, it falls a long way short of a disaster.

In a year or two, profits would rebound and normal business would resume. Farrelly's calculations suggest that the whole episode would reduce 10-year average returns by around just 0.5% per annum.

Now, a much more likely scenario is that if residential property prices do fall that it will be more like a fall of around 20% (rather than 35%). This causes a one-off reduction in profits of closer to 4%. It's a blip.

Residential property lending makes the banks safer, not riskier

The bottom line is this: residential property lending is actually an extremely profitable and safe activity for the banks. The fact that the Australian banks' lending books are highly concentrated in home loan lending should be a source of comfort rather than concern. It's the equivalent of having 70% of a portfolio invested in government bonds – the concentration, in this instance, makes the portfolio safer, not riskier.

Disclaimer: This article is not legal advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every care has been taken in the preparation of this information, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Australian Unity Personal Financial Services Ltd is a registered tax (financial) adviser. Any views expressed are those of the author and do not represent the views of Australian Unity Personal Financial Services Ltd. If you intend to rely on any tax advice in this document you should seek advice from a tax professional. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL & Australian Credit Licence No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in October 2017. © Copyright 2017

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Cash is Making a Comeback – Is Your Business Ready to Take It?

By Clarke McEwan • December 3, 2025

The Government has released draft regulations that would require certain retailers to accept cash payments, ensuring Australians can still buy essential goods like groceries and fuel – even when technology fails. The change aims to stop people from being excluded when power, internet, or card systems go down, or when they simply prefer to pay in cash. Who Will Need to Accept Cash – and Who Won’t The new rules are targeted and, importantly, practical. They’ll apply to fuel stations and grocery retailers, including both major supermarket chains and independent operators, but only for in-person transactions under $500. That means you won’t have to accept someone paying for a $700 tyre replacement or bulk farm supplies in cash – it’s about the everyday essentials. If your business (or franchise group) has an annual turnover of less than $10 million, you’ll be exempt. That’s good news for most small businesses such as family-run grocers, local cafés, and corner stores already managing tight margins and staffing challenges. The regulations are expected to take effect from 1 January 2026, with a review after three years to see how the system is working in practice. Why It’s Happening The move comes as part of a broader push to maintain access and fairness in Australia’s payment system. The Government and industry groups have recognised that while most Australians are happy to tap their card or phone, around 10–15% still prefer to use cash – particularly older Australians and those in regional or remote areas. There’s also a resilience angle: during bushfires, floods, or power outages, card networks can go offline. In those moments, cash becomes essential. What This Means for Your Business For larger retailers, this change will mean dusting off cash-handling policies and reintroducing processes that many have phased out. That may include: Re-establishing cash floats and tills Staff training to handle and verify cash More frequent bank deposits and reconciliation procedures For small businesses that fall under the $10 million exemption, the key step will be to document your turnover clearly so you can demonstrate that the exemption applies. We can help ensure your records and structures support that. There may also be commercial upside. Accepting cash could attract a segment of customers who’ve drifted away as stores went digital – especially in regional areas where cash use remains strong. A small business that promotes “cash welcome” could even gain new loyal customers who value convenience and personal service. Preparing for the Change With final regulations expected soon, it’s worth starting to plan now. Review your payment policies, assess whether you’re likely to be caught by the new rules, and budget for any setup or compliance costs. If you’re exempt, ensure your records are watertight. If not, look for ways to streamline cash handling – for example, by using digital cash counters or smart safes to reduce errors and time spent on reconciliations. Looking Ahead Cash isn’t going away just yet. This reform is about maintaining choice, resilience, and fairness in how Australians pay – and ensuring businesses are ready when customers want to use it. If you’d like help assessing how these rules could affect your operations or what the exemption means for your business, get in touch with our team.

Know the Rules Before You Break Them: Why SMSF Education Matters More Than Ever

By Clarke McEwan • December 3, 2025

Why understanding SISA matters You can’t comply with what you don’t know: Many common breaches arise from misunderstanding basic SISA duties (for example, sole purpose, arm’s length dealings, or in-house asset limits). Awareness of the rules is the first step to spotting a problem early. Early identification reduces harm: Knowing what to look for, incorrect benefit payments, related party transactions that aren’t on commercial terms, or records that are incomplete, lets you seek advice before small errors become reportable contraventions. Education protects members: The consequences of a breach can include loss of tax concessions, penalties and remediation costs that reduce retirement savings for members. The ATO’s Focus on Education — What Trustees Need to Know The ATO has recently published a draft Practice Statement (PS LA 2025/D2) explaining when it might issue an education direction under section 160 of SISA. These directions give the ATO power to require trustees (or directors of corporate trustees) to complete specified education, where trustees’ knowledge or behaviour poses a risk to compliance. The draft statement sets out the ATO’s approach and the kinds of circumstances that may lead to an education direction. However, trustees should not wait for an ATO directive before getting educated – such a directive means the trustees have already breached the rules. The draft Practice Statement is intended to support compliance and public confidence, but it is not a substitute for proactive trustee learning. Acting early and voluntarily is both safer for trustees and viewed more favourably by regulators. Practical Steps Trustees Can Consider Use ATO’s official SMSF guidance Start with the ATO’s SMSF courses on the lifecycle of an SMSF, setting up, running and winding up. These courses are written for trustees and prospective trustees: Setting up an SMSF: https://smallbusiness.taxsuperandyou.gov.au/setting-up-a-self-managed-super-fund-smsf Running an SMSF: https://smallbusiness.taxsuperandyou.gov.au/running-a-self-managed-super-fund-smsf Winding up an SMSF: https://smallbusiness.taxsuperandyou.gov.au/winding-self-managed-super-fund-smsf Complete the ATO’s ‘knowledge check’ The ATO provides an online “knowledge check” for each course designed to test trustee understanding. It’s a useful starting point, but note a pass mark of 50% should not be taken as a guarantee of safety. Trustees should consider whether aiming for a much higher standard, even 100% comprehension of core duties, is a more appropriate target to reduce risk. Seek timely professional advice If a knowledge check or your reading flags uncertainty, contact us early to discuss your concerns. Timely, qualified advice often transforms a potential contravention into a routine fix and may mitigate potential penalties or ATO enforcement action. Document your learning and decisions Keep records of training completed, who provided advice, and why investment or payment decisions were made. Good records are persuasive evidence of a trustee’s intent to comply. Final Word SMSF trustees hold both opportunity and responsibility. Learning the SISA rules and the ATO’s expectations is the most practical way to prevent costly mistakes. The ATO’s draft Practice Statement shows the regulator is prepared to use education directions where trustees’ knowledge gaps pose risks, but you shouldn’t wait to be told. Build your knowledge, use the ATO’s resources, complete the knowledge check, document what you learn, and seek professional help confidently and early. That approach better protects your fund and retirement outcomes.

Unlocking Tax Savings: Can Your MBA (or Other Studies) Pay Off at Tax Time?

By Clarke McEwan • December 3, 2025

The ATO’s rules on self-education expenses are strict, and the line between “deductible” and “non-deductible” can be thin. Getting it right could mean thousands back in your pocket; getting it wrong could mean an ATO adjustment, plus interest and penalties. Let’s unpack how it works with a real-world example and some practical takeaways. The Scenario: Sarah’s MBA Sarah works in the Department of Defence and recently completed an MBA through a private provider. Her employer supported her studies with a $40,000 study allowance, and the course fees totalled $18,000. She deferred payment using the FEE-HELP loan system and declared the allowance as taxable income in her return. Now she’s asking: Can I claim a deduction for my MBA fees? Does it matter that I used FEE-HELP? Does the employer allowance change things? The Type of Loan Matters First, not all funding for education courses is treated equally. HECS-HELP - no deduction: If your course is a Commonwealth supported place (most undergraduate and some postgraduate university programs), you can’t claim a deduction. There is specific legislation in the tax system which denies deductions for fees covered by HECS-HELP — even if you pay them upfront and even if the course is closely related to your work. FEE-HELP - potential deduction: If you’re in a full-fee course, your tuition fees might be deductible if the study directly relates to your current employment or business activities. The ATO doesn’t allow a deduction for loan repayments later on — just the course fees themselves. Practical tip: Check your course statement or loan confirmation to see if you’re under HECS-HELP or FEE-HELP. Only FEE-HELP (or private payment) gives you potential deductibility. The “Nexus” Test — Linking Study to Your Current Work Even if the funding passes the first test, the purpose of the study is key. The ATO will only allow deductions if the course maintains or improves the skills you already use in your job, or is likely to increase your income in that same role. It won’t apply if you’re studying to move into a new field or start a different career. The ATO issued a detailed ruling on this topic in 2024 which provides some clear examples: Allowed: A store manager doing an MBA to strengthen leadership and business operations skills. Denied: A sales rep doing an MBA to change careers into consulting — the link to the current role was too weak. For Sarah, the deduction depends on whether her MBA subjects (like strategy, policy or management) build directly on her current Defence role. The fact that her employer funded the course helps demonstrate relevance, but it’s not proof on its own. In some cases you might find that specific subjects or modules are sufficiently linked with current income earning activities, while other subjects are too general in nature for the fees to be deductible. Employer Allowances and HELP Repayments The $40,000 allowance Sarah received is assessable income — it’s taxed just like salary. But that doesn’t stop her from claiming eligible self-education deductions for the course fees. HELP loan repayments later on are not deductible — they’re simply a repayment of debt. The timing of the deduction is based on when the course expense was incurred (not when the loan is repaid). Making It Practical If you’re planning further study or reviewing a recent course, here’s how to make sure you get it right: Check your loan type – FEE-HELP or private fees can be deductible; HECS-HELP cannot. Gather evidence – Keep course outlines, job descriptions, and any correspondence showing the study supports your current work. Claim what’s relevant – You can only claim expenses directly connected to your current job (fees, books, and possibly travel). Be ready for review – Large claims often attract ATO attention. A private ruling can provide peace of mind if the amount is significant. Key Takeaways For many professionals, postgraduate studies like an MBA can deliver both career and tax benefits — but only if they relate directly to your current role. Handled correctly, self-education deductions can return thousands in tax savings. For Sarah, that could mean a refund of over $5,000 on an $18,000 course. If you’re considering further study, talk to us before you enrol or claim. A quick chat could ensure your next qualification delivers the best return — professionally and financially.

Super on Payday: Fundamental Changes for Employers

By Clarke McEwan • December 3, 2025

It’s called Payday Super, and it became law on 4 November 2025. The new rules are designed to close Australia’s $6.25 billion unpaid super gap and make sure employees — especially casual and part-time workers — get their retirement savings when they get paid. What’s Changing? From 1 July 2026, you’ll need to pay superannuation guarantee (SG) contributions at the same time as wages, rather than weeks or months later. Employers will have seven business days from payday to ensure contributions hit employees’ super funds. If payments are late, the Superannuation Guarantee Charge (SGC) will apply — that means paying the missed super plus an interest and administration penalty. Once SGC has been assessed, additional interest and penalties may apply if the SGC liability isn’t paid in full. Unlike the existing system, SGC amounts will normally be deductible to employers, although penalties for late payment of SGC won’t be deductible. On top of this, the ATO will retire the Small Business Superannuation Clearing House (SBSCH) platform from 1 July 2026 for all users and alternative options should be sought. The change isn’t just about compliance — it’s about impact. The Government estimates the earlier payments could boost an average worker’s retirement balance by around $7,700. Why It’s Good for Business This reform might sound like extra admin, and it might take a bit of getting used to, but it can actually simplify your payroll process and strengthen your reputation as an employer. Less admin – Paying super when you run payroll means no more quarterly payment crunches. Fewer compliance risks – ATO data-matching will pick up issues faster, helping you avoid penalties before they snowball. Stronger employee trust – Staff can see their super growing in real time, which might help with engagement and retention. Smoother cash flow management – Paying smaller, regular amounts of super is often easier to manage than large quarterly sums. The ATO will take a “risk-based” approach for the first year, focusing on education and helping businesses transition smoothly. If you pay on time, you’ll likely be flagged as low risk, meaning fewer compliance checks. How to Get Ready — Practical Steps to Take Now You’ve got time before the rules kick in, but the smart move is to prepare early. Here’s how: Check your payroll software. Most modern systems (like Xero, MYOB, or QuickBooks) already support payday-aligned super. Confirm your setup and check if any updates or integrations are needed. Map your pay cycles. Note how often you pay staff (weekly, fortnightly, monthly) and calculate the seven-day payment window for each. Brief your team. Make sure whoever manages payroll understands the changes. The ATO has free online resources and webinars to help. Plan your cash flow. Consider shifting from quarterly to more regular payments now to get used to the timing. Smaller, frequent super payments can reduce cash flow shocks. Monitor and review. Set up a monthly check to ensure super contributions have cleared correctly. Keep an eye on ATO updates as final guidance is released. If you outsource payroll, contact your provider soon — many are already updating systems for Payday Super and can help you make a seamless switch. The Bottom Line Payday Super isn’t just a compliance change — it’s an opportunity to make your payroll more efficient, your staff happier, and your business more compliant with less effort. With the laws now passed and just over 6 months to prepare, it’s time to get ahead of the curve. If you’d like help reviewing your payroll setup or planning the transition, get in touch with our team — we can help you make sure your business is ready to go when Payday Super commences.