Banking Royal Commission set to cause a rush of court cases

Banking Royal Commission ASIC Australia court cases
WEEKLY MARKET REPORT

In case it hasn’t been clear so far, it is now becoming obvious that the Banking Royal Commission is going to produce a massive outbreak of criminal and civil litigation.

While the recommendations will also hopefully lead to a long overdue improvement of the regulation and remuneration practices of financial planners and the lending practices of the big banks, there is now no doubt that the Royal Commissioner Ken Hayne also wants some criminal conviction scalps to nail to the wall.

Carcasses on the fence to deter future misbehaviour

Like a farmer leaving fox carcasses hanging on a fence, Commissioner Hayne probably correctly estimates that only by leaving some memorable casualties behind will the next rising crop of bankers and financial planners be able to curb their base instincts for grabbing as much money as possible.

Senior counsel assisting the commission Rowena Orr has told Commissioner Hayne, that it is open for him to find that AMP breached the Corporations Act by making “material” and “deliberate” attempts to mislead the regulator, the Australian Securities and Investments Commission (ASIC).

It had done that by continuing to mislead ASIC about the “extent and nature” of the ongoing fee for no service conduct, even when senior managers at AMP were aware such conduct was a breach of their obligations.

Even stars fall to earth

Similarly, “star’’ financial planner Sam Henderson’s firm Henderson Maxwell has been recommended for criminal charges for information supplied in a financial document to Fair Work Commissioner Donna McKenna.

In that case, Orr said Henderson might have breached his obligation to act in his client’s best interest and to give priority to her over his own interests.

Henderson advised Donna McKenna to roll her public sector super fund into a self-managed super fund to be managed by the firm which would have given Henderson’s firm thousands of dollars in fees.

However, the advice would also have cost McKenna A$500,000 for withdrawing early from one of her public sector super funds.

Others that are also in the firing line for potential Corporations Act breaches include the Commonwealth Bank of Australia for not reporting fees for no service issues to ASIC for two years, CBA’s Colonial First State for charging investment platform fees inappropriately and Dover Financial for engaging in misleading and deceptive conduct in connection with its client protection policy and in failing to comply with financial services laws.

That is what we know so far and there are likely to be many more recommendations for court actions that the Royal Commission has unearthed.

Not only has the Royal Commission been creating many legal and financial sector shockwaves, the politicians haven’t been immune with Financial Services Minister Kelly O’Dwyer coming under severe fire for refusing to concede that the Turnbull Government should have called the Royal Commission earlier given the volume of the revelations.

Finally she decided to relent and has now admitted that the Government did get its timing wrong and should have acted earlier.

House lending under pressure even as regulator eases up

One of the other interesting developments has been the removal of the 10% investor housing credit growth limit set three years ago by APRA, Australia’s banking regulator.

While it is tempting to think that dropping the 10% speed limit on investor home loans is a good thing, the reason APRA has been able to take this action is two-fold – investor housing loan growth is stalling anyway and the new set of rules around interest only loans and income-based lending restrictions promise to keep a lid on loan growth.

Some JP Morgan research on the removal of the cap said it should not be viewed as an easing of lending conditions and predicted continuing headwinds for household spending.

APRA said the decision to lift the cap reflected that Australian lenders have taken steps to improve loan quality, raise standards and increase capital resilience.

With house prices already falling in the main Australian markets of Sydney and Melbourne and the risk of bank lending becoming much stricter after the Royal Commission together with the potential removal of upfront and trail commissions for mortgage brokers and the ability of new Comprehensive Credit reporting to get a more complete picture of a borrower’s overall debt position, there is even a risk of a full on credit crunch in the housing market.

Add in the possibility of a future Labor Federal Government changing negative gearing rules and the large number of interest only borrowers rolling over to principal and interest payments, and the chance of a significant slow-down in household credit growth seems on the cards.

Which is a big deal given that household consumption is the largest component in the Australian economy, representing around 60% of real GDP.

Inflation still weak

One of the other interesting developments has been Australia’s stubborn lack of inflation.

The March inflation figures once again showed underlying inflation running at just 1.9% over the past year, well below the Reserve Bank’s target of between 2% and 3%.

The inflation numbers are uneven with the former mining boom city of Perth particularly sluggish while cities with stronger employment growth such as Melbourne and Sydney better but still below trend.

Inflation would have been even weaker if food and housing costs hadn’t been rising, along with education and health.

Within the overall housing cost rise, electricity and gas have been particularly prominent and have caused a lot of household heartache after prices rose faster than inflation for the past five years.

Small cap news

The Aussie small cap market was dominated by resources this week, although an eager beaver pot stock also makes it into our roundup.

The overarching theme was exploration and more specifically, commercially-viable exploration of raw commodities that foster the growth of energy storage such as lithium, cobalt and manganese.

Sabre Resources (ASX: SBR)

Sabre has gone out into the field with its acquisition musket firing. This past week the junior explorer announced a sweeping buyout of Kinetic Metals including its three primetime vanadium projects scattered around Western Australia.

The funding for the acquisition is being sourced from an oversubscribed capital raising that secured Sabre A$1.58 million.

Sabre’s board called the move as the ideal way to “take advantage of the dynamic market conditions that relate to the dominant battery-metals sector”.

With increasingly more ASX-listed resources companies marching into the field searching for battery-sector related commercial opportunities, micro-capped Sabre is officially on the ground floor given its growing portfolio combined with its current A$6 million market cap.

Bowen Coking Coal (ASX: BCB)

Bowen stepped up its game this week by announcing a significant 37 million tonne expansion of its resource estimate for its Cooroorah Project in Queensland.

The new total boosts the explorer’s total Cooroorah resource by 23% to 154 million tonnes, with further infill drilling set to move more resources from the inferred to indicated categories in the coming months.

The encouraging exploration update has now set the stage for Bowen to expand its exploration program and complete a pre-feasibility study on its wholly-owned Cooroorah project in the near term.

Bowen said that thick Mammoth seam at the project may hold superior quality coal compared to lower seams, which puts further emphasis on washability tests currently ongoing and expected to be published in the “coming weeks”.

EHR Resources (ASX: EHX)

The team behind EHR is set to commence its Phase 2 diamond drilling campaign at the La Victoria gold and silver project in Peru, which it is developing alongside Canada-based and TSX-listed Eloro Resources (TSXV: ELO).

EHR can earn 25% of the La Victoria gold and silver project in Peru simply by conducting more exploration. Having done 2,261m of reconnaissance drilling at the project’s Rufina prospect already and bolstered by amiable results, EHR is well on course to achieving its target.

The next stage is for EHR to send in a diamond drilling crew into explorative drilling next month and to reach a 25% ownership stake in the foreseeable future.

To facilitate additional exploration the junior explorer said it has undertaken A$1.9 million placement to fund drilling activity.

Archer Exploration (ASX: AXE)

Archer Exploration became the latest ASX-listed junior to put its hat in the ring for developing the most avant-garde technologies from its polymetallic abundance.

Following lab results of manganese sourced from Jamieson Tank, Archer confirmed that its manganese is low in iron and other impurities, which makes it suitable for EMD production.

EMD stands for electrolytic manganese dioxide, a critical component in the manufacture of lithium-ion battery cathode material for electric vehicles.

Archer says its manganese is 92% pure which is more than sufficient for alkaline and lithium-ion battery production.

Not only that, but the previous owners of Jamieson Tank completed more than 11,000m of drilling which Archer hopes to harness when obtaining its own JORC resource.

For now, Archer hopes to publish an official exploration target in the coming weeks.

Andromeda Metals (ASX: ADN)

Yet more exploration news came from Andromeda Metals this week.

Australian-based metals exploration is hotting up from all perspectives. Not only does Australia have an abundance of pretty much all possible metals required for the impending energy storage battery-powered revolution, but it seems to also have an abundance of technical nous to make efficient energy storage a commercial reality.

Andromeda is looking to acquire 75% of a high purity alumina (HPA) project in South Australia and spending at least A$6 million on developing the project over the next five years.

The Poochera Kaolin-Halloysite Project is located on the Eyre Peninsula and is comprised of three tenements, located 635km from Adelaide and 130km from Ceduna.

Before the ink is even dry on the joint venture agreement with Minotaur Exploration (ASX: MEP), there is already talk of early mining approvals and start-up mining operations within two-to-three years.

High purity alumina has been touted as a new-age feedstock commodity that’s critical to the supply chain of many high-tech products including lithium-ion batteries within the broader energy storage sector that has garnered widespread attention in recent years.

Riedel Resources (ASX: RIE)

Yet another polymetallic contender made headlines this week.

Riedel Resources received high-grade assay results from its flagship La Profunda cobalt-copper-nickel mine in northern Spain. The results were highly encouraging with individual samples presenting bonanza grades such as 27.2% copper, 0.27% cobalt, 35.3 grams per tonne silver.

With these early rock-chip samples in hand, Riedel has quickly mobilised its maiden drilling program, designed to test multiple high priority targets and to delve deeper into the commercial potential of La Profunda.

Riedel hailed its “excellent exploration upside potential” at La Profunda and confirmed that both on-ground logistics and earthworks were “well advanced” with drilling equipment ready for the starter’s gun with only administrative approval still pending.

The Hydroponics Company (ASX: THC)

It’s not only resource companies that had a bumper week.

Medical cannabis just keeps on growing as a market niche around the world with Australia being one of the primary countries with some catching up to do, compared to the likes of the US and Canada.

This week’s news that The Hydroponics Company bought its very own growing facility in Queensland, Australia – and looking to smoke all its competition in the process by posting quarterly revenue figures in excess of A$1 million that’s growing by 30% quarter on quarter.

The company not only secured a production plant but managed to buy one of the largest pharmaceutical botanicals extraction and refinement plants in the southern hemisphere.

The newly-acquired facility provides The Hydroponics Company with a fully functioning bio-manufacturing plant able to produce a broad range of high quality, pure cannabinoids as active pharmaceutical ingredients – a product that has seen stronger price inflation than gold, cobalt, graphite or even lithium over the past decade.

Otto Energy (ASX: OEL)

With metals of all sorts and varieties leading the resources and mining sectors, oilers shouldn’t be forgotten.

Even without the mammoth potential offered by non-conventional (fracking) exploration that’s making the news recently, conventional exploration isn’t doing too bad.

Otto Energy announced that its 50%-owned offshore South Marsh Island Block 71 oil platform in the Gulf of Mexico was generating daily revenue of US$149,730 per day and US$4.5 million per month – which whittles down to over US$3.6 million (A$4.7 million) per month in profit for the burgeoning oiler.

Rising oil prices have something to do with Otto’s heart-warming performance with additional cheer coming from the fact that Otto’s Louisiana sweet crude is earning a sales premium to the traditional West Texas Intermediate benchmark.

Otto Energy’s joint-venture with Byron Energy produced 83,000 barrels of oil, with Otto’s share amounting to 41,500 barrels and 27.7 million cubic feet of natural gas.

The high-flying oiler reported that its realised oil price in the month of March is around US$68 per barrel with the company receiving a net price of approximately US$64.40 per barrel.

Week ahead: Is the US still on the recovery path?

We are set for an interesting week coming up with a forest of US economic information which should answer the vital question of whether wage growth and inflation have finally started to take off in the world’s biggest economy.

Which will lead in to the US Federal Reserve’s meeting on 1 and 2 of May.

While unemployment has been slashed and economic growth has returned, wage growth and inflation have remained stubbornly slow.

Now, a slew of data could finally answer the question including figures on prices and pay, earnings reports, treasury numbers, economic growth, employment cost, personal consumption, inflation and personal consumption expenditures.

Already earnings growth has been looking great with the big US technology stocks going for a tear on stronger than expected results from Amazon and Intel.

The so-called FANG block of shares in Facebook, Amazon, Netflix and Google’s parent Alphabet, added almost US$87 billion in market capitalisation during last Thursday’s trading session alone, showing that technology stocks can be very resilient, particularly given Facebook’s high profile issues with privacy.

John is a highly experienced business journalist and formerly chief business writer for the Herald Sun. He has covered Federal politics in Canberra, was Los Angeles Bureau chief for News Limited and was also chief of staff for the Herald Sun. He has covered a wide range of small and large cap ASX stocks and has a special interest in mining, technology and biotech.