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More pain for bank shareholders

Bank shareholders should be prepared for lower earnings and dividends – and that comes straight from the head of one of Australia’s regional banks.

Another two banks have recently warned about lower growth – this time it was the turn of Commonwealth Bank of Australia (ASX: CBA) and Bendigo and Adelaide Bank (ASX: BEN).

At today’s Commonwealth Bank AGM, chairman, David Turner advised that the local economic climate remains uncertain and he expects credit growth to remain subdued (read: low), and that it was difficult to see a catalyst to alleviate the uncertainty affecting consumer and corporate confidence.

That follows Bendigo boss Mike Hurst’s comments on Monday that the economic outlook was gloomy and demand for loans low, which in turn makes it difficult to grow revenue whilst maintaining profitability. He added that new regulatory changes required higher capital to held by banks, driving increased costs of deposits. Combined with the low interest rates, he said that banks will experience lower returns than those in the years prior to the GFC.

Related: Banks expect more defaults

That follows Bank of Queensland (ASX: BOQ) and National Australia Bank (ASX: NAB) flagging similar issues and profit downgrades, because of higher provisions for bad debts. Mr Hurst said that those downgrades showed how difficult conditions were for the industry. He warned investors to expect lower returns from banks in future, and if history is any guide, he expects the current financial crisis to last at least another five years and perhaps longer.

The Foolish bottom line

Here at the Motley Fool, we’ve warned for some time that investors should not rely upon rising earnings and dividends from the banks. We could see falling earnings, dividends slashed, losses instead of profits, and in a worst case scenario, a bailout of a bank by the government, with shareholders losing much of their capital.

If you only invest in one company this year, make it our “Top Stock for 2012-13”. Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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