Australia Markets close in 2 hrs 1 min

Are ASX banks facing cyclical or structural decline?

Tristan Harrison
Bank stress

ASX banks are under a lot of pressure at the moment.

Some of the big four ASX banks of Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ) and Commonwealth Bank of Australia (ASX: CBA) recently reported lower cash profit, even after excluding customer remediation.

Most ASX banks, not just the majors, are showing a decline in the net interest margin (NIM).

All banks have been required by APRA to increase their capital buffer on the balance sheet so that they are “unquestionably strong”.

Some banks like Westpac and Bank of Queensland Limited (ASX: BOQ) are having to raise capital to meet the capital requirements of APRA.

The question for investors in the banks is whether all of these problems are cyclical or structural. It’s hard for banks to maintain their NIM and market share with these ultra-low interest rates because maintaining profit margins would lose customers.

Interest rates are meant to be cyclical, they go up and down with the cycles. But, Japan has had low interest rates for decades. Banks can’t make much money when the central bank interest rate goes below 1%, particularly if it hits 0%. There’s no guarantee that interest rates will go back above 2% in the next couple of years or even in the next decade – there’s a lot of rises between here and there.

Another problem is the amount of competition facing banks. Mortgage brokers and comparison sites have made loans more of a commodity product, meaning the lowest wins. There are lots of non-bank lenders trying to get in on the action. Tech giants are also creeping into the industry with offerings like Google Pay and Apple Pay.

Foolish takeaway

In my opinion, things like low interest rates are probably just cyclical. But more competition (particularly from tech) and higher capital requirements seem to be here to stay.

It’s no wonder that Magellan Financial Group Ltd’s (ASX: MFG) Hamish Douglass said there’s no bank in the world that he’d want to invest in at the moment.

The post Are ASX banks facing cyclical or structural decline? appeared first on Motley Fool Australia.

I agree with him, I would much rather put my money towards these top ASX shares.

3 Top ASX Dividend Shares To Buy Today

When Edward Vesely -- our resident dividend expert -- has a stock tip, it can pay to listen. With huge winners like Dicker Data (up 147%) and Collins Food (up 105%) under his belt, Edward is building an enviable following amongst investors that are planning for retirement.

In a brand new report, Edward has just revealed what he believes are the 3 best dividend stocks for income-hungry investors to buy now. All 3 stocks are paying growing fully franked dividends giving you the opportunity to combine capital appreciation with attractive dividend yields.

Best of all, Edward’s “Top 3 Dividend Shares To Buy For 2020” report is totally free to all Motley Fool readers.

Click here now to access this free report.

More reading

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019