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RBA says Big 4 ASX Banks profits could be permanently hit

The Reserve Bank of Australia (RBA) has said the banks like Commonwealth Bank of Australia (ASX: CBA) could face a permanent hit to profits.

The Royal Commission is weighing heavily on CBA, Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC).

RBA assistant governor Michelle Bullock was quoted as saying “Changes to business models to address the risk of future misconduct could more permanently impact banks’ financial performance.”

I completely agree with what she’s saying.

We’re nowhere near the end of the Royal Commission and already the banks have had to recognise costs to the tune of hundreds of millions of dollars just to get to this stage.

There could be more fines, more refunds and there’s class actions looming in the background.

As investors, we often praise the businesses that can grow efficiencies or sell more products to the same customer. Just think of why the business models of Paragon Care Ltd (ASX: PGC) and Gentrack Group Ltd (ASX: GTK) work well.

The banks milked its vertical banking setup very well with insurance, super, loans, wealth management and so on. It was a very profitable strategy. However, now that this system is being broken up there will be less add-on services it can offer. Plus, incentives are being changed and the customer is now wiser.

Are the banks buys?

No, I don’t think they are. Despite the fall in share price I think they face even more trouble over the next few years. They may continue to pay out large dividends, but there’s a higher chance that the payouts will be cut like Telstra Corporation Ltd’s (ASX: TLS) was.

The banks are facing pressure on all sides and will be less profitable after all of this is said and done.

I’d much rather own smaller ASX businesses which don’t face continuous political pressure, like this hot ASX stock which has gone up by nearly 25% over the past year with more profit growth to come.

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Motley Fool contributor Tristan Harrison owns shares of Paragon Care Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended GENTRACK FPO NZ and Paragon Care 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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