If you thought the growing headwinds buffeting the banking sector are well flagged and documented – think again!
I don't think all the risks are being priced into Australia's favourite Big Bank stocks even as the sector grapples with a sluggish domestic economy and tighter banking regulations that are constraining the growth of our largest mortgage lenders.
It's competition that could shape up to be a bigger threat to growth and I am not referring to industry disruptors like crypto currencies and peer-to-peer lenders.
The competitive threat comes from within the oligopoly and Australia and New Zealand Banking Group's (ASX: ANZ) change in strategy as it comes under new management has lifted this threat level by another notch.
Incoming chief executive Shayne Elliott indicated he is backing away from ANZ Bank's Asian expansion that was pioneered under his predecessor Mike Smith and will instead focus on winning a greater share of the local mortgage market to drive earnings growth, reported the Australian Financial Review.
It is probably lost on most investors, but Westpac Banking Corp's (ASX: WBC) new boss Brian Hartzer is looking at pulling the same lever to drive profits as he looks to bring in a million new customers to the bank over the next two years.
As I wrote last month, Westpac's grab for market share will risk reigniting a war for bank customers and this is why investors should pay close attention to ANZ's new growth plan.
The key battle ground could be centered in New South Wales where Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB), Westpac and its subsidiary St George Bank have been outselling ANZ Bank on mortgages.
"We used to joke we were the No.5 bank of four in NSW… and it's not just Sydney (but) right across the state," he said. "NSW is one of our priorities."
This is good news for borrowers but not so good for shareholders as the Big Banks' profit margins have been coming under increasing pressure.
While I am not expecting aggressive or irrational competition to erupt in the near-term as the Big Banks are more focused on sustaining their dividend payouts through stable, if not modest growth, this could change quickly if shareholders turn their attention to growth instead of income as the US Federal Reserve leads the world to a higher interest rate environment.
This is why I am bullish on the banking sector for the short-term on the back of their high yields, but neutral to negative on the sector on a two-year view because of their earnings growth profile.
Buy the banks, but don't take your eyes off your investment.
