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3 alarming reasons you should avoid buying big bank shares

Did you know Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) account for over 30% of Australia’s S&P/ASX 200 Index (ASX: XJO) (^AXJO)?

Put simply, that means they dominate the Australian stock exchange and can be credited with the market’s tremendous run over the past two and 20 years.

In the past decade, the best Big Four bank to own would have been Commonwealth Bank. It has risen over 153% not including dividends and now controls 25.3% of home loans, 24.7% of credit cards and 18.2% of other household lending.

Westpac, our second biggest bank, has also leveraged its performance from continuous growth in the housing market – its shares have climbed over 105% not including dividends.

But can they continue at the same rate in the future?

I believe the answer is no.

Here are three reasons why investors considering buying big bank shares should hold off, for now.

1. We’ve entered a period of significantly low interest rates. Interest rates are important for many reasons but there are some obvious consequences for Aussie bank shares. For example, amongst income investors, the banks’ dividends become extremely popular when interest rates are low and the increased demand pushes their share prices higher (currently three of the four banks are at all-time highs). Secondly, bank profitability is squeezed because less people are willing to invest in savings accounts or term deposits (rightly so). As a result of the funding pressure, each of the big banks recently posted a fall in Net Interest Margins.

2. Banks will not grow significantly in Australia over the next 10 years. House prices cannot go up at the same rate they have forever and the banks will not be able to grow by consolidating the market with acquisitions of smaller banks and lenders, as they have in the past. For example, CBA and Westpac bought Bankwest and St.George, respectively, in the fallout of the GFC. These opportunistic purchases are no longer possible.

3. Increased competition is taking its toll on profitability. The big banks have enjoyed years of excessive fees, independent interest rate movements and sticky contractual agreements. However with new laws allowing faster loan transfers between banks and regional lenders who are willing to offer a discounted rate, the banks are up against it. In addition, growth is getting more expensive with mortgage brokers offering potential home-owners more choice.

With the exception of ANZ, none of the big banks have viable growth strategies to see them exceed 5% per annum revenue growth in the long-term. 5% growth per year isn’t that bad, but when you consider their high share prices, it’s obvious that none of the big banks are a buy.

Don’t worry, here’s how you can still profit 

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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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