Why this fund manager sees limited growth potential for ASX 200 banks

Are the days of bountiful returns from bank shares numbered?

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ANZ share price A worried pink piggy bank in dark waters, indicating pressure on the banking sector

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The big four banks have outperformed the S&P/ASX 200 Index (ASX: XJO) over the past year. A flurry of monetary stimulus and central bank backing throughout the COVID-19 pandemic bolstered ASX 200 bank shares.

However, one fundie believes the best returns for the banking sector might be behind it. As fierce competitors make headway into the entrenched finance industry, fintech companies could be set to eat at least a portion of the bank’s lunch.

How ASX 200 banks could be challenged

Loyal shareholders of any of the big four banks have enjoyed handsome returns over the past 12 months. As a quick summary — below are the returns if you owned shares in these ASX 200 banking behemoths:

  • Commonwealth Bank of Australia (ASX: CBA) up 57.6% to $103
  • Westpac Banking Corp (ASX: WBC) up 53.5% to $25.90
  • National Australia Bank Ltd (ASX: NAB) up 61.1% to $27.94, and
  • Australia and New Zealand Banking Group Ltd (ASX: ANZ) up 60% to $27.80

For comparison, investing in the broader ASX 200 would have netted a return of 26% before dividends. Which is nothing to be sneezed at. Although, the worst performer of the big four dished out double this gain before dividends. This might have investors contemplating the potential of future returns from the banks.

Well, one fundie has shared their perspective, which might dispel some of the euphoria circulating among bank investors. In an interview with the AFR, co-head of equities at Antares Capital, Nick Pashias cast his doubts on the possibility of further upside to the big four constituents.

Namely, Pashias pointed towards the trend in the disintermediation of the banking sector. In other words, customers are seeing the benefit in fewer intermediaries being involved in financial processes. One glaring example is the explosion in buy now, pay later (BNPL) services, such as Afterpay Ltd (ASX: APT).

The disruption invoked by fintech companies has only accelerated over the last 24 months due to the implications of COVID-19.

As a result, Pashias states, “…one of the casualties may be not only our banks but banking more broadly. The rise of the fintech sector is here to stay, and although volumes and profits are still small, we believe they will chip away at the profit pools that banks have enjoyed for many years.”

Less is more when it comes to finance

Momentum has grown around a new financial business model, unique from that of ASX 200 bank shares, that doesn’t involve hefty interest charges to customers. Fintechs are taking a fresh approach to finance and looking for alternative ways to produce revenue.

In the case of BNPL, the income is predominantly from merchants, as the product adds value in bringing increased sales, improved conversion, and heightened customer loyalty.

This new model might find itself extending beyond credit for product purchases. Earlier in the week, InvestSMART unveiled its ‘fundlater‘ offering. This adds a BNPL-esque spin on the bank’s leveraged investing offering, which comes with interest repayments and the risks of margin calls.

In short, fundlater allows investors to invest up to $10,000 with an initial investment of $4,000. From there, the individual makes fixed monthly repayments with no margin calls, and no interest fees, aside from a $20 per month facility fee.

The product demonstrates yet another encroachment on the profit pool of ASX 200 banks.

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Motley Fool contributor Mitchell Lawler owns shares of Commonwealth Bank of Australia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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