Over the last 20 years the big banks have provided great capital growth and delightful dividends. They have ridden the wave of Australia's recession-free economy and rising property prices.
However, with the recent rises in the share prices of all the banks, I think it's time to consider selling because I don't see much upside from here for the following reasons:
Cyclical low bad debt and low interest rates
Over the last few reporting periods, the major banks such as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) have all reported lower bad debts.
The declining interest rate has helped Australian households' budgets by having to fork out less on interest payments.
However, bad debts are usually cyclical and it is likely that they will increase in the coming years. This could be amplified by the rising interest rates in the USA that our banks have passed onto mortgage holders. This may be beneficial for banks in the short-term, but it could drastically increase the possibility of trouble in the medium-term.
Higher bad debts will be a hit to profitability if and when they occur. Standard and Poor's have reported that Australian residential mortgage arrears older than 30 days increased from 1.15% in December 2016 to 1.29% in January 2017.
Property bubble?
Every financial organisation in Australia seems to be having their say on property prices and whether it's a bubble. It's hard to know if it's a bubble until it's popped, however the property market does seem to have lost sight of reasonable value a long time ago.
If Australian wages or the rental market were increasing as fast as property prices it would make sense, but both wages and rent are stagnant in most cities.
If banks require homeowners to sell in a falling market, this could exacerbate any property market decline.
Foreign buying influence
The number of foreign buyers in the market is a substantial percentage of the total market. Both the Chinese and Australian governments are making it harder for Chinese buyers to buy property in Australia.
As Chinese nationals are the biggest percentage of foreign buyers, it could have a detrimental effect to the property market in Australia if a portion of these buyers are taken out of the market.
Increasing capital requirements
Amongst the clamour for regulators to do something, it's been suggested that the banks could be required to hold a further $20 billion of equity according to CLSA's Brian Johnson. This isn't a small figure, as it would result in further dilution of current shareholders' stakes in the banks.
I think higher capital requirements would be a prudent move on the regulator's behalf, but it would hurt the value of the banks' shares, earnings per share and perhaps dividends per share.
Foolish takeaway
I think all of the above reasons are just some of the points why the banks' share prices could materially decline over the next six to 24 months. I don't like to guess when the shares will be hit, so I'm avoiding bank shares altogether.
