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Australian investments in banks hit half a trillion dollars

A new report released by UBS claims that there was potential for a “concentration risk” in Australia, given the enormous amount of money Australians have invested in the big four banks.

Whilst the banks are coming off record-breaking annual profits and are still offering high dividend yields, the combined market capitalisation of the big four has been pushed to nearly $400 billion. Commonwealth Bank (ASX: CBA) maintains the largest market cap, at $124.4 billion, followed by Westpac’s (ASX: WBC) $101.5 billion, ANZ’s (ASX: ANZ) $87.4 billion and NAB’s (ASX: NAB) $79.4 billion.

However, when combined with other securities that are also linked to the banks, investments in the big four banks account for 21% of all household wealth within Australia, excluding housing and deposits. According to the report, that added up to half a trillion dollars. Furthermore, an additional $762 billion was also held as deposits at the big four.

The Australian Financial Review quoted UBS analysts Jon Mott and Chris Williams as saying, “While these statistics are an indication of the success of the banking sector over the last decade, it also highlights significant wealth concentration for many Australian households.”

Given the economy’s reliance on the success of the big four banks as well as Macquarie Group (ASX: MQG), the Australian Prudential Regulation Authority (APRA) is introducing new rules that will require the banks to hold more capital in reserve in case of a major economic downturn.

It has been suggested that the five banks could be required to hold an extra $14 billion (combined) in capital, which could put a dent on their ability to pay high dividends in the short- to medium-term.

Foolish takeaway

Although the banks’ profits have soared, it will become more and more difficult for their efforts to be repeated. This is because bad debts have remained low in recent times, but are expected to climb in the near future, which will negatively impact their earnings.

As such, shares in the banks remain unlikely to deliver market-beating returns in the long run and investors should be looking elsewhere for stock ideas.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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