Just when you thought things were finally looking up for the big four ASX banks, Morgan Stanley is warning that as much as 30% of their revenue is under threat from the growth of digital wallets.
This is sobering news for big bank shareholders who've rejoiced in the recent rebound in the Commonwealth Bank of Australia (ASX: CBA) share price, Westpac Banking Corp (ASX: WBC) share price, Australia and New Zealand Banking Group (ASX: ANZ) share price and National Australia Bank Ltd. (ASX: NAB) share price.
Their share prices have rallied between 4% and 9% over the past two weeks following the federal election compared with a flat outcome for the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
Investors have flocked back to banks on the belief that the housing market slump is over with the prospect of an interest rate cut next week, the removal of the negative gearing threat with federal Labor's defeat at the ballot box and the looser mortgage stress testing requirement from APRA.
E-wallets choking the lifeblood of big banks
But the bullish sentiment could soon fade with Morgan Stanley warning that mobile banking apps developed by the big four are at risk of being replaced by digital wallets developed by tech companies as consumers' first choice for payments.
"Payments are crucial to deposits – the lifeblood of the banks. We think payments are key to the next decade of banks' growth," said the broker.
"We think up to ~30% of major bank revenues are under threat from BigTech digital wallets seeking to lock customers into their ecosystems. This consists of ~11% primary revenues (e.g. transaction accounts) and another ~18% secondary revenues (e.g. term deposits)."
Why Australian banks are more at risk of the digital disruption
Total revenue from the big four banks came in at around $63 billion in the last financial year. This means these banks could lose up to around $19 billion from their top-line if Morgan Stanley's prediction comes to pass.
Investors shouldn't underestimate this risk either. Australia is particularly vulnerable to disruption from tech companies given the Open Banking initiative, e-money regulation review, new payments platform and comprehensive credit reporting.
Anything that breaks the link between customers and their banks will be a threat to future profit growth for the sector. While most of bank profits came from mortgages in the last two decades, Morgan Stanley believes the next decade will be driven by deposits.
"Our base case is the banks can protect their dominance in retail payments and deposits, but they will have to invest more in technology and sacrifice some revenues, leading to modest earnings headwinds and lower sustainable returns in retail banking," said Morgan Stanley
"In our bear case we see digital wallets disintermediating banks, leading to ~10% earnings downgrades. In contrast, we can't see a lot of upside in a bull case as we think the banks will struggle to find new revenue streams from payments."
And if you are wondering which big bank is best placed, the broker believes that's CBA. The bank that is most at risk is ANZ Bank.
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