Australia and New Zealand Banking Group (ASX: ANZ) this week announced an 18% rise in net profit to $6.938 billion.
CEO Shane Elliot said revenue growth was a challenge and they were facing increasing competition from emerging players and traditional rivals.
Despite the rise in profit. I am not convinced the big banks like ANZ and Westpac Banking Corp (ASX: WBC) are a good long-term investment.
Observing technological change is more useful at identifying losers than picking winners and I think the banks will lose out in this regard.
Banks are a lot slower at adopting newer technology than smaller, less bureaucratic and more efficient rivals.
The banks will look to protect high margin business like credit cards or forex, instead of changing and this will provide opportunities for smaller specialist players to win customers by providing a cheaper, more efficient service.
Residential mortgage financing is a large part of the banks' business, but most loans are originated through large mortgage broker groups, which now have the scale to expand into providing some of that lending themselves.
Obviously the banks can take over a successful smaller competitor, but losing customers in your core businesses and buying them back through acquiring competitors is not a strategy that creates shareholder wealth.
Another risk for banks is that all governments are seeking to avoid or minimise their risk guaranteeing the financial sector by requiring banks to increase capital levels, so banks may need to either (1) raise additional capital from their shareholders and/or (2) cut dividends to build up capital reserves. All of which will earn banks little or no additional profits.
While the banks offer a decent dividend yield, I think long term these are businesses in decline and there are a lot of smaller 'fintech' companies looking to disrupt and grow in the finance sector to choose from.
