They've been (and likely still are) the cornerstone of many Australian investors' portfolios. The last few decades have seen them grow like topsy. And yet, I'm suggesting they might well be best avoided.
I'm talking, of course, about our banks – primarily ANZ (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac (ASX: WBC).
From backbone to deadweight?
These companies have been the backbone of the gains in the ASX indices, and are mainstays of many superannuation and personal portfolios, but I'm not sure they still deserve that hallowed place.
Our banks are largely a proxy for broader economic activity – and particularly the leverage being used to achieve that growth. And that's where the problem starts.
As we're all only too aware, economic growth – particularly outside the mining industry – has been patchy in the past few years. For a business that's directly leveraged to GDP (and with few opportunities to gain market share given the saturation of banks), that's bad news.
On top of that, Australia's businesses and households are 'deleveraging' at a huge rate. Effectively, we've been spooked by US and European recessions and our own slowdown, and like a teenager who suddenly discovers his own mortality, we've reassessed the degree to which we were living beyond our means. Credit cards are being paid off, extra money being directed to our mortgages, and we've rediscovered 'rainy day' savings.
Good for the economy, bad for the banks
Those changes in behaviour are unquestionably good for our economy (as long as it's not taken to extremes). Extra savings make individuals, businesses and our economy as a whole much more resilient in the face of external shocks. It bad news for marginal businesses who were built only for 'business as usual' – and we've seen a few businesses go to the wall as a result.
Our banks are unlikely to face that fate, but they have grown in past years on the back of increasing consumer debt, mortgage debt and business debt – exactly the things that have gone into reverse recently. Bank of Queensland (ASX: BOQ) has also had recent troubles of its own.
They are also likely to have exposure to those businesses that are facing trouble – such as the troubles that befell Hastie Group (ASX: HST) in the past couple of days.
One of the hardest things to do in investing is make money from a business that isn't growing. It possible that our banks will find ways to grow in the years ahead (ANZ in particular is staking out ground in Asia) and it's unlikely that the lessons of the past few years will remain at the front of our minds when the recent troubles become history.
Foolish take-away
Conversely, one of the easiest – if least practiced – things investors can do is simply take a pass when we can't reach a high level of conviction for a particular company. No-one holds the proverbial gun to your head and makes you take a view on every company on the ASX.
Banks have been a licence to print money over the past few decades, but that run may be coming to an end – or at least moderating. Having a large portion of a portfolio in banks at this point might be more risky than it has been for many years.
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Scott Phillips is an investment analyst with The Motley Fool. You can follow Scott on Twitter @TMFGilla. Take Stock is The Motley Fool Australia'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. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691).
