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3 reasons investors should be wary of bank shares in 2015

Whether you own Australia’s largest bank, namely Commonwealth Bank of Australia (ASX: CBA), one of the other majors such as Australia and New Zealand Banking Group (ASX: ANZ) or one of the second tier banks such as Bendigo and Adelaide Bank Ltd (ASX: BEN), in every case you have cause to be wary of the soon to be released Financial System Inquiry report by David Murray.

In fact, all will be revealed at 10:30am this coming Sunday morning at a press conference held by the Treasurer Joe Hockey when the final report will be released to the public. It will of course take some time to thoroughly dissect the details of the report. However any fall-out will no doubt begin to be felt across the banking sector on Monday morning and it will also likely set the tone for the performance of the sector in 2015.

Here are three reasons bank shareholders should be wary:

  1. Past inquiries into Australia’s financial institutions (there have been two major ones) have both resulted in significant shake-ups to the industry. There is little reason to think that this one won’t lead to similarly significant changes.
  2. As reported by ABC News, in the wake of the global financial crisis (GFC) the objectives of this inquiry are far reaching with the aim of fostering “a more stable and efficient financial system”.
  3. It seems likely that the banks will be forced to hold more capital. Holding more capital in effect restricts a bank’s ability to make more money. If this is one of the recommendations, and if it is ultimately implemented by the government it could reasonably be expected to lead to a reduction in returns on equity. Dividend payouts may also come under pressure.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned.

 

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