Is the ASX banking sector going to cause the next crash?

Could the ASX banking sector cause the next crash.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Is it possible that the ASX banking sector is going to cause the next crash?

One could argue that the actions of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) have already caused a bit of a downturn.

Their relaxed lending in the early 2010s saw house prices rise significantly and the subsequent royal commission put a dampener on many discretionary businesses on the ASX like Nick Scali Limited (ASX: NCK) and Flight Centre Travel Group Ltd (ASX: FLT).

But there is still concern that the over indebtedness of many Australian households could cause issues down the line. Just because Armageddon doesn't happen (or ever happens), doesn't mean the underlying situation has improved.

Just look at Westpac's mortgage delinquencies. At March 2019 its 30+ day delinquencies had increased to 1.59% from 1.44% at March 2018. The 90+ day delinquencies have gone from 0.69% at March 2018 to 0.72% at September 2018 and 0.82% at March 2019. Most banks are seeing a rising trend.

When will this trend stop? If delinquencies reaches a certain level it could be a disaster for banks' bad debts and the economy as a whole. I'm certainly not predicting another GFC, but the knock-on effect from housing can affect all areas of the economy, like we saw in the USA.

Whilst stress testing a bank is not meant to be a bank's prediction that things are going to go wrong, it can provide an insight into what might happen if things were to turn bad. Westpac's latest disclosed mortgage portfolio stress testing showed that a severe recession would send unemployment over 10% with house prices dropping by 35% and cumulative losses of around $5 billion, wiping out its profit, although Westpac would survive.

Foolish takeaway

With such large assets and liabilities, I think banks are riskier than some people think. It can take years for poor lending to show up. That's why I don't want to ever invest in ASX banks. Why take the risk when that once-in-a-generation event can happen?

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. 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.

More on Bank Shares

A corporate female wearing glasses looks intently at a virtual reality screen with shapes and lights representing Block shares going up today
Bank Shares

Are Westpac shares a buy following the bank's big tech update?

Is now a good time to buy the banking giant's shares? Let's find out.

Read more »

Different Australian dollar notes in the palm of two hands, symbolising dividends.
Bank Shares

Own CBA shares? It's payday for you!

A dividend is heading to CBA shareholders’ bank accounts.

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
Bank Shares

Are CBA shares really worth $120?

It has been a good year for ASX bank shareholders.

Read more »

a group of people sit around a computer in an office environment.
Bank Shares

Westpac shares push higher on $9.8b technology simplification plan

Westpac plans to spend big on technology to close the gap on its rivals.

Read more »

A worried woman looks at her phone and laptop, seeking ways to tighten her belt against inflation.
Economy

NAB boss issues dire prediction for Aussie economy

NAB’s CEO has issued a stark warning on the outlook for Australia’s economic growth.

Read more »

Contented looking man leans back in his chair at his desk and smiles.
Bank Shares

Own CBA shares? Here's the tech stock the banking giant just invested in

CBA has made an interesting investment. Here's what you need to know.

Read more »

A woman gives two fist pumps with a big smile as she learns of her windfall, sitting at her desk.
Bank Shares

ANZ shares charge higher on $57.5 million class action settlement news

ANZ shares have continued their positive run on Monday.

Read more »

Two people comparing and analysing material.
Bank Shares

Better buy: CBA or Westpac stock?

Which ASX bank share is a better buy?

Read more »