Why I’ll (probably) never buy big bank shares

There’s no doubt that over the past 25 years the big banks have driven the Australian share market higher and higher. During that time they have paid an astonishing amount of cash out as dividends and continue to maintain high dividend payout ratios.

If you’ve held shares of Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) throughout the last two decades you’re probably sitting on a very nice amount of wealth!

However, the past is the past. I’m not sure the future is anywhere near as bright or ‘growthy’. The banks’ rise has been closely linked with Australia’s rising house prices and the fall in interest rates.

The undisturbed growth is unlikely to be repeated for a long time due to the clear environment of rising interest rates that Australia, and indeed the world, now faces.

However, there’s a lot more to my bank-disliking than just the above point(s).

The banks are among our biggest businesses on the ASX. They are not likely to grow their market share, the ACCC is unlikely to allow any more loan-business-related acquisitions. Growth will probably be limited to total credit growth, which will be low single digits for a while to come.

Another problem is that loans are commodity products. Bendigo and Adelaide Bank Ltd (ASX: BEN), Bank of Queensland Limited (ASX: BOQ), Suncorp Group Ltd (ASX: SUN), Macquarie Group Ltd (ASX: MQG), AMP Limited (ASX: AMP) and many others all have the capability of offering the same products as the big banks. There’s also a growing number of online-only providers, which have much lower costs. More competition means lower margins.

The big banks are also being forced to hold more capital. This makes them safer, but less profitable.

A key reason for my near-future negativity is that the banks are now expecting compensation and remediation to cost hundreds of millions of dollars in the fallout from the Royal Commission.

US and UK banks are regularly subject to compensation plans that can destroy profit growth for a few years. There’s a high chance of regulation risk relating to the banks these days. There’s also potential class action damages, which could be a major drag. It will, at minimum, cost a lot in legal fees.

Foolish takeaway

As a regular ‘retail’ investor I’m trying to beat the market whilst owning a lower-risk portfolio of shares. The big banks seem to offer limited growth for the upcoming years, whilst also offering (at best) fixed-ish income and a lot of downside potential.

I think there are many investment opportunities that would be better places for your money.

For example, these top shares have all proven to be long-term profit growers and are all paying solid dividends too.

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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.

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