National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) offer prospective investors dividend yields above 5% and a track record of success.
Through thick and thin, they’ve been able to continually grow profits and return excess funds to shareholders. So it’s no wonder millions of Australians hold some big bank shares in their managed portfolios and superannuation accounts.
However, the years of market-beating returns could be coming to end. Here are five reasons why:
1. As competition for market share between each other and regional lenders such as Bank of Queensland Limited (ASX: BOQ) heats up, banks will have to work harder for their earnings.
2. We’ve witnessed the big banks’ profitability slipping in the past five years, but in their most recent half-yearly results, each bank’s Net Interest Margin (NIM) – a key measure of bank profitability – fell.
3. House prices cannot rise at 6% or more forever. A continuous upwards trend in prices has played a big part in bank profits over the past two decades. Although low interest rates are affording mortgagees the opportunity to take on more debt, according to research from the OECD, which compared wage levels and rental income to house prices, Australian property represents poor value yet continued to climb at 6.6% over the past year. With ongoing demand for property from a growing population, which includes both local and international buyers, it’s unlikely we’ll experience a crash, but investors shouldn’t rule out the possibility of subdued lending growth.
4. In years gone by, the banks have been able to buy their growth. NAB and Westpac both have a number of brands under their control including UBank, St.George and RAMS. The lack of consolidation in coming years may force them into new growth areas which I’m tipping will not be as lucrative as the housing market was in the past 20 years.
5. Share prices are at all-time highs and trading on earnings multiples way above their 10-year annual average price-to-earnings ratios.
Although the banks offer tremendous dividend yields, have an excellent track record and a high level of perceived safety, the chances of them outperforming the market in the long term are slim at today’s prices. Margins continue to contract, bad debts will eventually have to rise, interest rates in term deposits will increase and earnings will come under pressure as a result. When this happens, I won’t be holding bank shares and hope you’re not either.
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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.
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