By now I'm sure you know big bank shares are expensive. Their dramatic run-up in price over the past 24 months has catapulted most of them to all-time highs.
Commonwealth Bank (ASX: CBA), ANZ Banking Group (ASX: ANZ), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) are the four pillars which uphold the Australian economy. So, naturally, they form a big part of many Australians' individual portfolios and superannuation accounts.
Of the four, ANZ Banking Group is my favourite and has been forecast by analysts to grow earnings per share quicker than any of its peers. Its Asian strategy has provided shareholders with excellent exposure to fast growing economies such as Indonesia and China.
However, like most of the big banks, its earnings have come under intense pressure in recent years and a number of alarming trends have emerged. Here's 3 which any bank shareholder needs to watch.
1. Bad and Doubtful Debts
Although each of the banks recent half-yearly results showed cash profit increases, their provision for bad and doubtful debts fell significantly. This allows them to boost profits in the short term but when interest rates rise and more Australian's feel the pressure of higher loan repayments, provisions will rise – putting pressure on earnings.
2. Net Interest Margins
ANZ is renowned for being one of the most efficient lenders of money. However, alarmingly, the banks half-year results presentation showed its Net Interest Margin (a key measure of banking profitability) had fallen to just 2.15%. It's the lowest result since the wake of the GFC, when it dropped to only 2.1%. This can be attributed to increased pressure from local lenders such as Bank of Queensland (ASX: BOQ) and Bendigo and Adelaide Bank (ASX: BEN) but also mortgage brokers like homeloans.com.au (ASX: HOM) and Mortgage Choice (ASX: MOC) who take a percentage of the applied interest rates as payment for their services.
3. Capital Requirements
Banks which are deemed "systemically important" are required to hold extra capital in case of a major economic downturn. ANZ recently reported its APRA Common Tier One ratio stood at 8.33% or 10.5% on an international harmonised Basel III basis. This was down from 8.5% in the previous half.
