It's no secret that the ASX banks didn't have their best year in 2019. Between dividend cuts, low interest rates, franking reductions and ongoing compensation payments resulting from the 2018 Royal Commission – it wasn't a happy year for shareholders. Westpac Banking Corp (ASX: WBC) was hit particularly hard with its ill-timed capital raise.
Although investors would be hoping for a better year in 2020, reporting in the Australian Financial Review (AFR) suggests otherwise.
In the report, the AFR quotes analysts from Macquarie Group Ltd (ASX: MQG), who have predicted the rise of buy-now, pay-later (BNPL) providers like Afterpay Ltd (ASX: APT) will increasingly damage the bottom line of the banks going forward.
Since the major banks make around $1.7 billion annually from payments and credit cards, it's a fertile field for disruptors like Afterpay to plough.
What's at stake for the banks?
Macquarie's analysts are predicting that up to 45% of bank revenues from credit cards and payment systems could be under threat from Afterpay and other BNPL players as well as the payment platforms offered by Apple (Apple Pay) and Alphabet (Google Pay). That would equate to $765 million in at-risk earnings.
The AFR report also notes the changing generational tastes of Millennials and Gen Z, who are far less likely to even want a credit card than some older demographics, and far more likely to embrace smartphone-based payment platforms like Apple Pay and Google Pay.
Obviously, these trends don't bode well for the future of the banks' credit card business. American payment giants American Express and Visa are also planning expansions of their own payment networks. If we place these trends together with the rise of neo-banks, open banking and increasing competition across the financial services industry, it doesn't indicate a particularly rosy future for the big four.
With low credit growth and record low interest rates, our ASX banks certainly didn't need any more headwinds, but it seems they've got them regardless. Even after the 2019 dividend cuts, all of the big four banks are pushing the limits of their payout ratios (how much of their profits are paid out as dividends). Westpac in particular is pushing over 95% – which is a clear warning sign.
Foolish takeaway
I'm not too excited about the banking sector's long-term growth prospects in light of these trends, and I certainly don't see any of the big four's dividends as safe at the current time.
