3 reasons to be wary of big bank shares

In investing, like life, nothing is guaranteed.

So investors must be constantly on the lookout for threats to their wealth, as well as opportunities.

Indeed, if the recent downtrend in the major banks’ share prices has taught us one thing, it’s that no ASX share is guaranteed to perform each and every year.

While the likes of Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB), Australia and New Zealand Banking Group (ASX:ANZ) and Westpac Banking Corp (ASX: WBC) have proven to be fair stewards of investors’ portfolios, it’s now just as important as ever to be critical of their ongoing success.

3 reasons to be wary of big bank shares

  1. Growing competition

Gone are the days when the major banks could hold mortgagees, credit card holders and depositors to ransom on account of a lack of competition (ok, the second one is debatable). Over two decades, the major banks have done well to fend off competition from international competitors, but APRA’s focus on maintaining stability in the banking system could continue to increase competition. For example, its decision to increase risk weightings on big four bank mortgages and force them to hold more capital in reserve will place further strain on their balance sheets and margins.

  1. Cyclicality

Banks are cyclical, which is evident from any long-term share price chart. Like the rest of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) their share prices will likely fall in times of uncertainty. However, the banks’ underlying profitability is the major sticking point. If the banks’ credit quality worsens over coming years, profits could be expected to follow suit.

  1. Exposure

Many Australian investors are overexposed to the banking and property sectors, whether a result of recent growth in market prices, dividend reinvestment plans or simply a lack of better ideas. Another issue is the banks’ exposure to the resources sector – which is doing it tough, the investor-driven property market, and Asia. Investors should be wary of excess exposure to any one of these sectors.

Foolish takeaway

Bank shares have fallen quite heavily in recent times. While they have proven successful investments for many share portfolios, it’s important to keep a well-diversified mix of shares in different industries and geographies at all times and be critical of all your shareholdings.

Nobody knows for sure if the worst is over for the banks. However, personally, I'd rather look for other - faster growing - dividend shares to add to my portfolio, such as the one The Motley Fool's expert analysts hand-picked as their best dividend share idea for 2016.

Indeed, our resident dividend experts named their Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is growing and trading on a 5.6% fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required!

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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