Given their size and weight within the Australian share market, the four major banks – Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC) rightly garner a lot of investors' time and attention.
Recently, analysis by broker Morgan Stanley has questioned if the amazing run bank shareholders have enjoyed over the past three years is coming to an end.
Here are five reasons to be cautious on bank shares from this point forward:
- According to Morgan Stanley, the cycle of earnings upgrades is coming to an end. This alone will put pressure on the multiples that the banking sector currently trades on.
- Given the already high pay-out ratios, a lack of earnings growth means a lack of dividend growth. Yield-hungry investors have piled into the banks but there is also a risk that these investors will pile out!
- Loan losses are at the bottom of the cycle and are bound to move higher in future periods. This will limit earnings growth and also has the potential to produce negative earnings shocks.
- Outcomes from the Financial System Inquiry are likely to lead to higher capital requirements for banks. Morgan Stanley's analysis suggests an extra $24 billion of capital will be required by the banking sector.
- A weakening of investor sentiment towards banks could see investors lock in profits and look to invest their money into other sectors of the market which could lead to bank shares coming under significant selling pressure.