MENU

Even without a falling housing market, I’d be wary of the big banks

The big banks of 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 been generating huge profits for years.

If you’ve been a shareholder for 20 (or more) years then you’ve definitely done very well. But, I’m personally wary of investing any money into the big banks at the moment for two main reasons and a smaller third reason.

Fines and regulation

Our banks have been very profitable, perhaps too profitable according to some of the investigations into their practices in recent years, particularly in the Royal Commission.

The problem for shareholders is that a lot of the public, media, government bodies and politicians want ‘blood’. We can see that with the recent allegations of cartel activity of ANZ.

Commonwealth Bank has just copped a $700 million fine from the AUSTRAC investigation into its ATM reporting.

These fines can be huge hits to profits. UK banks have had their own list of scandals since the GFC which has cost billions in fines, which hurt the bottom line. Just ask NAB and CYBG Plc (ASX: CYB) about the PPI scandal and subsequent compensation.

These fines can wipe out any growth a bank may have generated for the year.

Another problem is that all the additional regulations makes banks inherently less profitable than they were before. Even if that’s better for Australia as a whole and makes the banks safer.

Size

Our banks are some of the most profitable in the world and they’re also really big considering Australia’s population is only around 25 million people.

When the market capitalisation is above $70 billion it gets a lot harder to grow the business by 100%, or even 10%.

If you’re looking for market-beating opportunities it’s probably best to look for smaller shares that have more room to grow.

Competition

Banks are also facing more competition for various segments of their business. Online-only lenders have a lower-costing operating model, although their funding is a little more expensive. Technology businesses are looking to take some of the bank’s revenue like Apple and Google.

Over time, bank earnings could be nibbled away. Nearly all of the bank’s future earnings could depend on the mortgage market.

Foolish takeaway

I think there are several significant headwinds facing the banks. Credit growth is slowing considerably and banks may continue to face an uptick in banking arrears if house prices continue to fall and interest rates rise. I wouldn’t invest in the banks unless Australia was in the middle of a recession.

A much better option for your investment money than the banks would be one of these top stocks.

4 Stocks for Building Wealth After 50

Renowned investor Scott Phillips just released a brand-new report detailing his 4 favorite stocks to buy right now.

And I don't know about you, but I always pay attention when some of the best investors in the world give me a stock tip.

This is your chance to get in at the very beginning of what could prove to be very special investments.

Click here to get started today!

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.