The formerly beloved ASX banking sector has taken a huge hit in the year that's just passed us by. Still reeling from the revelations of the 2019 Royal Commission, 2019 saw more than one ASX bank admit to serious criminal activity taking place on their services.
Three of the 'big four' slashed their sacred dividend/franking credit payments to shareholders and Westpac Banking Corp (ASX: WBC) has had to undertake a capital raising program, which is anathematic to existing shareholders.
As a result, the share prices of Westpac, National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) have (to borrow a phrase from former Prime Minister Paul Keating) 'ground to a halt in nowhere land'.
Only Commonwealth Bank of Australia (ASX: CBA) managed to eke out an 11% share price gain in 2019 (still below the performance of the broader market).
But is this the turning point? Will our ASX banks recover in 2020 or was 2019 just the start of a 'new normal'?
What does 2020 hold for ASX banks?
It's worth noting up front that interest rates look likely to continue on their current dovish downwards path in 2020, on top of the three interest rate cuts we saw last year. This will likely have the effect of further damaging the banks' abilities to generate profits.
Of course, that's still a hypothetical situation. But if we look at some of the Reserve Bank of Australia's recent comments, it's at least a distinct possibility to say the least.
Low interest rates translate to lower 'spreads' on the banks' capital – that is, the difference in interest rates on what the banks pay to their creditors (from savings accounts, for example) and what the banks receive from their debtors (home loans etc.).
I'm also watching the housing market closely. House prices are directly linked to the banks' profitability. Rising property prices normally translate into more loans of higher sizes and less defaults for the banks – but the inverse is also true. If property prices go through another hiccup in 2020, the outlook for the banks will again worsen.
Foolish takeaway
I think the banks will have a better year in 2020 than last year, but this is dependent on a lot of variables. Overall, I think there is still significant short-term risk for the ASX banks, and so I'm not too wild about increasing my personal exposure. Still, there's no doubt that the banks are still formidable income shares to own and I don't see this changing too much going forward.
