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6 reasons why you should avoid the big four banks

Much has been written about Australia’s big four banks in recent times. Their dividends are almost legendary, and their position in Australia’s financial system makes them ‘too big to fail’.

The share prices of Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) have soared over the past few years, leaving many retail and institutional shareholders sitting on giant positions in the banks.

So let’s take a look at six reasons why investors should not be investing in the banks now.

  1. Between the big four banks and other financial sector stocks, they account for 45.4% of the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO), with much of that attributed to the big four. A fall in the market will hit the banks heavily.
    Large ASX financial sector
    Source: Standard and Poor’s
  2. Earnings growth is mostly coming from lower costs and falling bad debts – a situation that is not sustainable for very long. Eventually banks must generate growing revenues to see earnings growth and consequently, their share prices rise.
  3. Heavy exposure to a fall in Australia’s property market. The banks control an estimated 80% or more of the mortgage market. Falling house prices could wipe out their profits.
  4. Rising unemployment. As unemployment rises, so too do bad debts. The banks have had it their way for a long time, but the cycle could be about to turn, as the mining boom comes to an end and manufacturing in other sectors continues to struggle.
  5. Current share prices for all four banks are expensive on any measure compared to their historical values as well as their international peers.
  6. A government-led bailout of any of the big four banks would see shareholders virtually wiped out – a situation that occurred in three of the UK’s largest, most respected and well-known banks Royal Bank of Scotland (RBS), Lloyds TSB and HBOS.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga