The golden age could be over for the ASX banks of Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ).
Michael Wayne from Medallion Financial published a piece for Livewire commenting how investors need to focus on the future with banks (and all shares) not their impressive history over the past 30 years.
Here are some of the reasons why it could be the end of the golden age of banking:
Interest rates
Interest rates had been dropping for 30 years, ever since the 1980s. However, interest rates are now on the rise in the US and this will act as a headwind for credit growth, particularly when the RBA starts increasing interest rates.
Regulation
Banks are now facing scrutiny and regulation due to many issues brought up in the Royal Commission. APRA and ASIC will likely not let banks loosen their lending requirements for a while to come.
Real Wages
Wage growth has become very slow.
People could point to various factors such as businesses focusing too much on costs, global competition with globalisation, immigration and smaller productivity gains. Whatever the reason, households are struggling to pay off debt and this lowers the capacity of borrowers.
Bank credit
Bank credit is steadily drifting to a lower and lower growth rate. Bank profit growth will become snail-like if the loan book is hardly growing, which doesn't take into account the worsening net interest margin (NIM).
Household debt
Household debt has risen to nearly 200% of disposable income. Whilst households have been able to take on more debt as interest rates fall, that trick is no longer possible with rising interest rates.
Australian households cannot sustainably become any more indebted than they currently are.
House prices
The house price to income ratio has risen to such a high level that many of Australia's cities are among the most expensive in the world, making buying a house out of reach for some.
For the people that could buy a house, the falling house prices may encourage them to wait a bit longer.
Falling house prices could also lead to growing bad debts for the banks.
Foolish takeaway
The moves to make banks safer is likely a net positive for the whole banking system (including from the public and government's perspective), however it does ultimately reduce the profitability of the banks.
Investors may be attracted to the yield, but it could be a yield trap for now.
