As first reported by The Wall Street Journal (WSJ) on Tuesday, the US Federal Deposit Insurance Corporation (FDIC) is seeking to ramp-up scrutiny of fund managers with stakes surpassing 10 per cent in FDIC-regulated banks to ensure they are adhering with a more passive role in these institutions.
Currently, fund managers in the US are effectively exempt from banking regulations, such as the requirement to seek permission when acquiring shares beyond the 10 per cent threshold, as long as they maintain a “passive” role without exerting influence on boards or management. Nonetheless, they retain the ability to vote in shareholder elections.
FDIC board members, including Jonathan McKernan, are pushing for heightened monitoring of asset management giants, including BlackRock, Vanguard, and State Street, over fears of their potentially assertive influence within financial institutions, as reported by the WSJ this week.
“We need to be doing more to actually confirm that the big three are not leveraging their large stakes to exert influence over FDIC-regulated banks,” McKernan was quoted as saying.
Some of the US’ largest banks, including Bank of America, Citigroup, and JPMorgan Chase, count BlackRock, Vanguard, and State Street among their top shareholders.
Interestingly, these asset managers are also deemed “substantial shareholders” in Australia’s big four, according to their respective 2023 annual reports filed with the Australian Securities Exchange (ASX).
Namely, BlackRock holds 6 per cent voting power in NAB, followed by State Street (5.21 per cent), and Vanguard (5 per cent).
The trend is mirrored at ANZ, Westpac, and Commonwealth Bank of Australia, where these three firms collectively hold 5 percent or more of voting shares.
Responding to an inquiry from InvestorDaily in relation to the push for more oversight in the US, Vanguard stressed its passive role in the banks, noting that it “leaves management decisions to the underlying companies in the index and policy decisions to policymakers”.
“We look forward to continuing our constructive dialogue with the FDIC to answer questions about Vanguard’s proven, long-term investment approach,” the firm said in a statement.
A BlackRock spokesperson directed InvestorDaily to the firm’s stewardship engagement priorities, which explicitly state that “BlackRock investment stewardship does not dictate companies’ actions.”
“Our role, on behalf of our clients as long-term investors, is to better understand how corporate leadership is managing risks and capitalising on opportunities to help protect and enhance the company’s ability to deliver long-term financial returns,” it read.
InvestorDaily also reached out to State Street for comment but did not receive a reply by the time of publication.
Are banks a ‘different beast’ in Australia?
Locally, professionals are not concerned about the involvement of fund giants in the big four, citing several determining factors.
Speaking to InvestorDaily, AMP’s chief economist and head of investment strategy, Shane Oliver, said the market dominance of the big four banks makes it challenging for a large fund manager to avoid shareholding in them.
“In Australia, we are dominated by four really big banks. Because they are a big chunk of the share market, it’s hard for a large fund manager not to have a shareholding in them,” Oliver said.
“But a 5 per cent or so exposure is low and not going to result in a lot of influence on what the bank does. In any case, our banks are subject to solid prudential regulations which will limit what a fund manager with a larger shareholding could do anyway.”
Regarding prudential regulations, Oliver said policymakers in Australia were guided by a desire to have “an unquestionably strong banking system” after the financial system review in 2014.
“And this has led to pretty solid prudential regulation and scrutiny versus the US. I think having just four major banks has added to the level of scrutiny.”
Turning to the US, Oliver noted the vast number of banks in the market makes it easier for large fund managers to attain significant exposure to a particular bank.
Conversely, the primary influence fund managers wield over banks in Australia is reflected in their share prices.
“Australia is a smaller share market so an individual large fund manager has the potential to have a bigger influence on a share price for a bank or any listed company. Of course, if the influence is perceived as unjustified by other investors, then they may see an opportunity to trade against it.”
AMP’s deputy chief economist, Diana Mousina, agreed that historically, asset managers leveraging their investment influence has not been a significant issue in Australia.
“From my point of view, there appears to be less lobbying by corporates in Australia in the political process compared to the US, maybe because of compulsory voting and less need for large sponsors,” she suggested.
Additionally, with banks having a large weight in the index, even fund managers holding the index in Australia would have an outsized impact on banks’ share prices, Mousina said.
The allure of the Big Four
The big four banks have emerged as appealing investments for both foreign and local investors.
Having outperformed the S&P/ASX 300 Total Return Index by around 20 per cent for the year to 29 February 2024, Australia’s banking sector “still looks reasonably attractive”, according to Australian fund manager Maple-Brown Abbott.
Referencing Goldman Sachs data, the fund manager outlined banks are trading at a P/E ratio of around 16x or a 35-year high.
“Any way you cut it, the banks have had a pretty good run,” admitted Dougal Maple-Brown, head of Australian value equities.
He also highlighted reports of foreign investors purchasing shares in the banks, especially by Asian investors seeking alternatives to investments in China.
“You can see why big, liquid Aussie banks fit the bill here, particularly given Australian resource stocks are generally considered a leveraged play on China,” Maple-Brown explained.
Over the past year, the fund manager’s portfolios held overweight positions in ANZ, NAB and Westpac, premised on sensible earnings forecasts and reasonable valuations.
It has recently reduced its positions as valuations became less appealing. However, the firm believes that banks are nearing fair value rather than being excessively expensive.
“The big four remain a strong pillar of the Australian economy and make up over 20 per cent of our equity market.”
