It certainly has been a tough year or two for our ASX bank shares. Although Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) are arguably the crown jewels of the ASX, for most investors it has been a disappointing ride recently.
Take CommBank – CBA shares were trading for around $96 back in 2015 (its last all-time high). Fast forward to April 2017, and CBA was asking around $87 a share. Hit the double arrows again and today, CBA shares will set you back just $79.60 – meaning CommBank shares have essentially gone nowhere since 2014.
It's a similar story with NAB, ANZ and Westpac shares.
Of course, the banks' saving grace has always been the dividends. I'd wager most bank shareholders aren't too concerned with capital growth anymore, as long as the dividends keep rolling through the door.
But even these dividends have come under pressure this year. Most of the banks haven't actually increased their dividend payouts for many years now. But 2019 saw the first time our banks have actually trimmed their payouts since the GFC. NAB and Westpac have both cut their raw dividends, whilst ANZ has reduced the level of franking from 100% to 70%. Only CBA has kept things steady, but 2020 is just around the corner, and many CommBank shareholders are fearing the worst.
Why have banks needed to trim their dividends?
At the end of the day, dividends are paid to shareholders out of a company's profits. If profits have fallen, there is less room to accommodate the dividends.
A perfect storm of factors has led to bank profits being squeezed over the last two years. Gyrations in property prices haven't helped, neither have the record compensation payments the banks have had to set aside as a result of last year's Royal Commission.
But it's the record low interest rates that have really spun out the banks. As interest rates have plumbed new lows, the spread between what the banks are paying in deposits and what they receive from loans like mortgages has fallen (you can't go much lower than zero, after all).
And if investors don't see real returns from their cash savings, there's less incentive to leave cash in the bank to start with – which reduces the pool of capital banks have to lend out. It's a double whammy.
Why I'm not selling my bank shares
All of this paints a very bleak picture, but I'm not selling my bank shares any time soon and here's why. The sheer marketing power of our big four is nothing to be sneezed at – their size and scale enables significant economies of scale and pricing power, which the banks have leveraged for decades and (in my opinion) will continue to do so. The financials sector is dealing with these difficulties on a macro scale, so if the big four are struggling, they won't be the only ones.
Economies always go through cycles of various natures, some of which aren't always obvious. But cycles by nature always swing back and when they do, I think the banks will be well positioned to ride the wave upwards. Thus, I'm happy to hold my bank shares through this tough time – and collect all of the dividends along the way.
