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.

Concerned about the sell off in bank shares? Don't miss this

The incredible bull market in bank shares could be ending. Find out all the details you need to know in The Motley Fool's newly updated report, "What Every Bank Shareholder MUST Know". Your copy is FREE when you click here now.

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

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.