Hundreds of thousands of investors have been left with the onerous task of deciding whether now is the time to load up on the Big Four bank stocks, or if it's time to abandon them altogether.
Since the depths of the Global Financial Crisis in 2009 to earlier this year, Australia's major banks acted as the key driving force behind the S&P/ASX 200's (Index: ^AXJO) (ASX: XJO) historic rally, generating enormous returns for investors over that time in the form of capital gains and generous, fully franked dividends. Three of the banks hit all-time highs earlier this year while National Australia Bank Ltd. (ASX: NAB) surged to its highest price since before the crisis.
But while many investors fell under the spell of believing the good times could continue indefinitely, most have found out the hard way that that is simply not the case. In fact, all four stocks have fallen into a "technical correction" – having all lost more than 10% since their respective peaks – while they have also all recorded negative gains since the beginning of the year.
Commonwealth Bank of Australia (ASX: CBA) has been the hardest hit, down 6.25%, while Westpac Banking Corp (ASX: WBC) and National Australia Bank are down 5.94% and 5.2% respectively. Australia and New Zealand Banking Group (ASX: ANZ) has fared the best of the group to trade 2.87% lower, compared to a 1.62% rise for the benchmark index.
Source: Google Finance
Is it time to buy?
Many investors would argue that now is the perfect time to buy the banks. Interest rates are expected to remain low (with the possibility of falling even lower) for the foreseeable future, making the banks' yields increasingly attractive in comparison to the returns offered by 'risk-free' investments.
Some would also argue that the banks have the ability to continue growing strongly, based on the fact that they have proven their ability to do so historically.
I would argue against buying the banks on both counts.
The banks' earnings are highly cyclical in nature. The low interest rate environment has led to strong credit growth as well as record-low loan impairment charges (bad debts) which have enabled the banks to report record profits in recent periods. At the same time, they have all rewarded investors with remarkable dividends, which have acted as a major reason behind the enormous share price appreciation enjoyed by each of the stocks.
But there are now a number of headwinds facing the banks, and the Australian economy as a whole, that not only threaten to restrict a future growth in earnings, but also their ability to continue growing dividends. Some of these headwinds include an inflated property market, stricter capital requirements that are likely to be implemented, competition impacting margins, and reputational damage from various incidents.
Rather than taking a risk on the banks, investors would be better off focusing their attention on other, more promising investment opportunities.
