2014 has been a mixed year for shareholders in Australia's big banks.
Lured in by the prospects of large fully franked dividend yields and record profits, Australian investors are likely disappointed at the returns thus far.
Indeed whilst the dividends declared throughout 2014 have been larger than ever, the share prices of all but one big bank have retreated since the beginning of the year.
Source: Google Finance
This month alone the share prices of Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have fallen 4.7%, 3.4% and 4% respectively. Commonwealth Bank of Australia (ASX: CBA) is down just 0.81%.
Whilst it could just be a minor short-term setback, here are three reasons why they could be falling in 2015…
- They're expensive. In the current low interest rate environment, dividends are in vogue and with our banks each sporting yields greater than 5% fully franked, it's easy to see why their share prices are so high. However high share prices are often more sensitive to bad news (see below)…
- Bleak economic outlook. Australia's economy and housing market is coming off a hot streak. Unemployment is rising and the dollar is falling. Given the big banks have been a haven for overseas investors who are seeking reliable dividend yields, the falling dollar and bleak outlook may lead to increased selling by foreign investors as well as by shareholders who've made handsome gains over the past few years.
- Profitability. Combined with poor levels of confidence, some analysts are suggesting the banks' profitability could now fall. In recent years the banks' net interest margins – a key measure of profitability – have shrunk, as competition for new loans and deposits intensifies. Further to this, the benefits of low interest rates (e.g. falling provisions for bad debts) has likely been fully realised.
Buy, Hold, or Sell?
In the near-term the Australian economy is facing a number of headwinds. Most notably a sharp drop in resources sector investment and increasing unemployment. Coupled with poor levels of confidence and a cooling property market, the outlook for Australia's big banks doesn't appear so good. Given their lofty valuations, I believe now is not the right time for investors to be rushing out and buying their shares.
