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I guarantee these stats will scare the hell out of big bank shareholders

big four banks 16:9

Yesterday we saw the National Australia Bank Ltd (ASX: NAB) cut its dividend 16% in response to rising regulatory pressures, falling net interest margins, and slower lending growth rates in Australia.

In fact the NAB share price at $25.78 is actually below the $26 level the shares traded consistently at in early 1999.

However, that’s nothing to worry about compared to the stats below.

It’s also notable NAB has paid a lot dividends over the past 20 years to mean total returns will be miles better, but the stat shows how not all big Australian banks are a one-way long-term bet for steady capital growth.

NAB also pursued a disastrous acquisition strategy in the UK market when it bought the now spun off Clydesdale & Yorkshire Bank (ASX: CYB), but it has still heavily underperformed peers such as Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) in terms of capital growth.

However, anyone still thinking the banking sector is always a good bet for long term capital growth should take a look at the below stats about the performance of some major European banks in recent years.

The stats cover the period from 2007 to April 2019 and are taken from analyst David Buik’s blog.

  • Barclays Bank from 731p to 163p, down 77%
  • Deutsche Bank $EUR107 to EUR9.71, down 91%
  • Credit Suisse CHF 88.94 to CHF13.62, down 86%
  • UBS in 2011 to today CHF70.12 to CHF 13.55, down 81%
  • Royal Bank of Scotland (equivalent before split) 6,056p to 251p, down 96%
  • HSBC 880p to 662p (-25%)

As Mr Buik points out this diabolical performance is despite a massive program of quantitive easing and taxpayer support since the GFC, to show how even famous blue-chip banking names can collapse in value.

The domestically-focused big 4 Australian banks are admittedly different to some of the investment banking focused names on the list above, although the political paralysis and feeble growth of European economies shows what can happen if a region hits a prolonged downturn.

These European banks have also suffered from years of ultra-low interest rates (as a symptom of almost no growth) in Europe, with much talk now that the Reserve Bank of Australia is getting ready to potentially cut benchmark lending rates to 1% in 2019.

NAB’s chairman has already warned in the media that he’s against a rate cut, as he doesn’t believe it will stimulate the economy and it’s no secret ultra-low lending rates are not good for bank profits.

Keynesian economics also argues ultra-low debt rates can produce a ‘liquidity trap’ where consumers fail to spend or borrow despite ultra-low-rates due to a belief that rates must go higher soon enough.

On top of this psychological impasse is the multiplier effect as the yields on debt, money market instruments and long dated bonds have become so low that an increase in money supply via rate cuts is less effective in stimulating growth or inflation due to the flood of liquidity.

This kind of bearish ‘Keynesian liquidity trap’ or ‘ultra-low-rate scenario’ could be a disaster for Australian bank shares if it coincided with an extended period of falling house prices.

To be clear I’m not suggesting you rush out and sell your bank shares, but just to keep a close eye on signs that Australia is heading into an extended downturn that will likely hurt, if not smash, valuations.

After all ultra-low-interest rates of 1% or lower will equal lower bank lending rates and likely lower bank profits.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

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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