The big four banks' shares are traditionally where retail investors have parked their self-managed super fund and personal portfolio funds.
Much of the attraction is the perceived safety of the big four banks, and the juicy fully franked dividends. It's also a possibility that many retail investors don't know where else to invest, and many appear to trust that their money is as safe in bank shares, as it is in their deposit accounts.
For many investors who bought bank shares this year, the recent correction in bank share prices has wiped out any gains from dividends. Since April, Australian and New Zealand Banking Group (ASX: ANZ) is down 9.4%, National Australia Bank (ASX: NAB) has lost 7.4% and Westpac Banking Corporation (ASX: WBC) 8.1% down. Commonwealth Bank of Australia (ASX: CBA) has lost 7.4% since it peaked on July 31.
That's around the same as the companies' grossed up annual dividend yields. What's worse is that more falls could be ahead.
The current Financial System Inquiry, led by ex-CBA banker David Murray has released an interim report, which suggests there could be major changes to our financial system – which could have adverse consequences for our big four banks in particular.
That includes changes to our superannuation system – virtually controlled by the big four and AMP Limited (ASX: AMP), financial planning and wealth management – again, mostly controlled by the 'big five', and potentially stricter rules on property lending within self-managed super funds.
The Inquiry has also highlighted the banks' exposure to Australian property through mortgages, with the report noting, "housing has become a significant source of systemic risk". That could see the big banks forced to hold more capital, and thereby reducing their ability to generate higher returns.
When some estimates put bank assets at $1 for every $75 in mortgage loans, our banks are heavily leveraged to property, and the inquiry's concerns appear valid.
We also have concerns being raised that the Australian property market has overheated, and if it's not in a bubble, it could be heading there rapidly. If property prices fall dramatically, that could have a major negative impact on Australia's big four banks.
The lesson is this: The dividend yield should be but one minor consideration when buying shares in a company. As the recent fall in the banks' share prices has shown – those dividends are now worth nothing.
