Investors have typically bought shares in Australia's big four banks for their perceived level of safety, exposure to Australia's booming property market, and their lucrative dividend yield.
What some investors appear to have forgotten, however – particularly in the years following the Global Financial Crisis – is that they do have their own set of risks, and they can decline in value – sometimes considerably.
Case in Point
Take Commonwealth Bank of Australia (ASX: CBA), its share price has fallen 20% over the last 12 months. It's fallen 23% since peaking in March, putting it in official bear territory, and it is trading 13.5% lower since the beginning of 2016 at $73.95.
That's not all – each of its major peers are also trading in bear territory: Westpac Banking Corp (ASX: WBC) has fallen 27.6% from its peak, while National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) are trading 37.2% and 39.1% below theirs, respectively.
Certainly, nearly a quarter of a century without an Australian recession has been a boon for the banks, as have rising property prices, rising household incomes and the mining boom. More recently, they've been aided by the record low interest rate environment which has helped to boost demand for loans and reduce bad debt charges.
The banks are cyclical in nature. To begin with, bad debt charges will eventually rise (they may already be at the turning point), as will interest rates, which will almost certainly apply pressure to their earnings potential. Even with interest rates and bad debts remaining low right now, the banks are already suffering as a result of intense competition (reducing net interest margins) as well as pressure from APRA.
APRA, or the Australian Prudential Regulation Authority, is forcing the banks to hold more capital against the loans they write. It's an important measure to ensure they remain protected against a potential economic downturn (so that the government and taxpayers don't have to bail them out), but it's also impacting their earnings growth.
Indeed, CBA's Return on Equity (ROE) – a key performance measure for the banks – fell by 140 basis points during the first-half of financial year 2016 (FY16) as a result of capital raised to adhere to APRA's tightened standards, while further reductions are still possible. Meanwhile, its interim dividend remained unchanged at $1.98 per share (fully franked), which no doubt disappointed some investors who had grown accustomed to six-monthly increases in their dividends.
Should you buy?
Some investors are likely eyeing off Commonwealth Bank's shares at their current price, together with the shares of its major rivals. Should they keep falling they could be worthy of a second look, but right now, based on the headwinds facing the sector, I think investors could do a lot better by looking elsewhere.
