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Long period of low growth ahead

That’s the view of Westpac Banking Corporation’s (ASX:WBC) chief executive Gail Kelly.

At a business lunch on Thursday Mrs Kelly warned businesses to expect low growth and low interest rates, on the back of subdued consumer sentiment. “Customers are still preferring to pay down debt, we’re seeing that in our numbers every single month. Customers are preferring to save,” she said.

The warning came just two days after the Reserve bank cut the official cash rate by 0.25% to a historic low of 2.5%, and further cuts could be coming. While the news is good for homeowners, lower rates usually mean a sluggish economy. Westpac surprised the market by passing on 0.28% to its home loan customers, while National Australia Bank (ASX:NAB) and Commonwealth Bank (ASX:CBA) passed on 0.25%. ANZ Bank (ASX:ANZ) is expected to cut its variable mortgage rates by 0.25% later today.

Mrs Kelly warned that despite the historic low interest rates, consumers are still cautious about spending and lacking confidence. “We’ve got to get used to this major trend of coping, and thriving in a lower growth arena,” she said, adding, “We’re dealing with structural changes, structural adjustments in our country as the mining boom tapers off, and there’s less investment going on.”

The rate cuts are forecast to slice around $56 million in profits from the big four banks combined, over the next twelve months. However, some of the cost will likely be passed onto term deposit holders through lower interest rates, with banks sourcing around 60% of the funding from deposits.

Lower interest rates and lower growth rates will also hamper the banks’ ability to grow earnings and thus increase their dividends, something many bank shareholders have become accustomed to over the past decade or so.

Foolish takeaway

With the big four banks all trading at significantly high prices, it seems investors expect strong growth to continue, and could be in for a shock over the next few years, unless credit growth climbs substantially.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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