Big four ASX banks like National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) face a number of issues.
Fines, penalties, customer remediation, class actions are making the end to this decade look quite difficult for banks.
One of the most shrewd pieces of investment advice is to be greedy when investors are fearful and fearful when investors are greedy. Investors are definitely fearful about banks right now, just look at how much their share prices have fallen since 2015. There are potentially very large fines coming up for NAB and Westpac.
Share markets have the habit of pricing businesses as though some temporary issues affecting companies will be permanent issues. At some point these fines, remediation and class actions will finish, although I fear we will continue to see the fallout for at least the next couple of years, but this alone wouldn't stop me investing. Indeed, it could be seen as an opportunity.
But for me, I think the more important things to consider for the banks are: credit growth, bad debts, interest rates and capital requirements and dividends. It is these reasons that causes me not want to hold the banks in my portfolio.
Credit growth is likely to be lower than the long-term average with how indebted the country is, though the rising property market should help a bit here in the shorter-term.
Bad debts are at cyclical lows, but they are unlikely to remain this low forever.
Interest rates in Australia are at record lows because of the Reserve Bank of Australia and it's hurting the net interest margin (NIM) of banks. Interest rates are predicted to go down and stay low for a long time.
Capital requirements are increasing in Australia and even more in New Zealand. It makes the banking system safer in recessions, but it reduces profitability for banks in most other years.
Dividends are likely to stay at this level or lower for quite a long time. Banks need to hold more capital and the big four will need to re-invest more if they want to grow profit over the next decade.
Foolish takeaway
I think banks face issues that are harder to solve over the longer-term than the current class actions, fines and remediation, as painful as those are. Commonwealth Bank of Australia (ASX: CBA) is probably the best investment out of the four big banks, but I wouldn't want to buy any of them for the long-term today.
