Just as you thought ASX big banks have mostly left their troubles behind as we moved into the new year, a top broker warns of another impending earnings headwind.
After spending most of the last year or two trying to overcome the fallout of the Banking Royal Commission, leadership changes, falling interest rates and wild swings in the housing market, Macquarie Group Ltd (ASX: MQG) believes falling fees will be the next headache for the big four.
The fee pressure is coming from banking disruptors – typically tech start-ups that are targeting lucrative areas of the banking and payment sectors that are dominated by the big financial institutions.
Fee to flee
These areas include currency exchange, funds transfers, credit financing, loans and deposits.
Coming back to the big four, Commonwealth Bank of Australia (ASX: CBA) has the most to lose among its peers from potential loss of fees to new non-bank rivals, according to Macquarie.
“With increased competition, evolving customer preferences and banks’ desire to improve their community standings, we see persisting fee pressures,” said the broker.
“In aggregate, we expect underlying fee reductions of ~$350-750m per bank between FY18-21, with CBA being more impacted than peers (albeit noting that a material reduction in CBA’s fees occurred between FY18-20).”
No turnaround for bank returns
This headwind comes at a time when bank returns have been falling. The big four, which also includes Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB), are struggling to win market share.
The fact that NAB just started a campaign offering $4,000 for homeowners to switch their mortgage to the bank (and another $2,000 for property investment) says it all.
Cashbacks for switching are a common practice in the industry, but I don’t remember it ever being this high.
Sacrificing profits for customers
A mortgage broker contact told me that the big boys are so competitive with their rates that smaller rivals are having difficulty offering a better deal to borrowers.
What time signals to me is that the big banks are sacrificing margin for market share. Shareholders should brace for short-term pain for long-term gain.
Having said this, CBA is still my pick of the big banks. While fee pressure could hurt it the most, its peers are facing bigger headaches in 2020 – like the loss of mortgage market share.
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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.