Justin Braitling, the fund manager of the $300 million listed investment company (LIC) Australian Leaders Fund Limited (ASX: ALF) recently published his quarterly investment newsletter which was as usual an insightful read.
Braitling chose to hone in on an important topic – "that a number of highly profitable Australian industries are under threat from new competition and the implications for listed companies that dominate then."
Watch out for your bank shares!
Braitling has identified at least three key factors which should make shareholders of bank stocks think twice.
- Digital disruption – In an open, capitalist economy excessive profit should attract competitors keen to grab a share of those profits. With the Australian banking industry's profit at record levels this could be about to occur, however, rather than being from traditional global banks looking to establish (or re-establish) a presence in Australia it could be from technology players such as Facebook and Google.
- Regulatory threat – The failure of banks overseas during the global financial crisis (GFC) has led to heightened supervision and regulation of the banking industry in Australia. Braitling highlights increased capital requirements as a key risk to bank profitability.
- Dividend payouts under threat – Not only are payout ratios at historically high levels that arguably are not sustainable, but the potential for higher capital requirements could force boards to rein in the generous dividends paid.
It's interesting to note that around half of the share registers of the major banks are made up of retail investors, no doubt many of which have been attracted to companies including Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) for their dividends. If that happens to be your sole reason for owning bank stocks…it could be time to think twice!
