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Will the “loyalty tax” hurt Big Four banking share prices?

According to an article in the Australian Financial Review (AFR) published yesterday evening, the major ASX banks are under fire for their so-called “loyalty tax”.

What is the “loyalty tax” from the ASX banks?

The article comes as the major ASX banks take fire for not passing on last week’s Reserve Bank of Australia (RBA) 25-basis point (bp) interest rate cut to their mortgage customers, as has been a trend in recent months.

The growing gap between mortgage rates to entice new borrowers and those offered to existing customers is growing, drawing the attention of the Australian Competition and Consumer Commission (ACCC).

According to this morning’s article, ACCC Chairman Rod Sims asked the AFR, “is the message that banks want to send that they are happy to dud their loyal customers?”

What does this mean for ASX Big Four bank shareholders?

While this might be bad news for borrowers, it could be argued that the banks’ refusal to pass on rate cuts in full is positive for the bottom-line and therefore management is acting in its shareholders’ best interests.

One problem here is that inevitably borrowers will have a fair amount of crossover with bank shareholders given the Big Four control about 80% of the lending market.

While not good for household debt levels, a greater lending margin for the majority of customers is good for bank earnings and therefore shareholder earnings through dividends.

Should you buy ASX banking stocks?

National Australia Bank Ltd (ASX: NAB) currently leads the banks in the dividend stakes, with a 6.5% per annum dividend paid out to its investors.

However, while dividend income among the Big Four banks is quite high in relation to the ASX 200 at the moment, the capital gains story isn’t quite as good.

The Commonwealth Bank of Australia (ASX: CBA) share price and Westpac Banking Corp (ASX: WBC) share price have climbed 10.02% and 17.08%, respectively at the time of writing.

Foolish takeaway

While the ASX banks haven’t been star performers amongst the ASX 200 so far this year, they do remain a large pillar of the Aussie share market and our economy as a whole.

If you're not convinced by the Big Four banks in 2019, I'd suggest checking out these 3 income stocks for a strong alternative.

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Motley Fool contributor Kenneth Hall has no position in any of the stocks mentioned. 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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