Banks Profit Growth is Expected to be Sluggish in 2016

Commonwealth Bank

Australian banks haven’t had a good start to the year. And it might not get any better. The mega giant, Finch Rating, has tipped 2016 to be stable for banks, but profits could be unsatisfying. Just another problem that to add to a growing list, especially for the big four banks.

So what has changed for banks?

Finch believes bank costs will be eating into profits. Increased funding costs, pressure on cost management and a modest increase in loan impairment charge. These are just some of the reasons why Fitch is predicting a slide in profits.  Finch specifically stated today:

Operating revenue growth is likely to be affected by a softer operating environment than in 2015, regulatory changes to the banks’ investor lending, which is likely to affect lending volume, and low interest rates combined with continuing slow credit growth.

Are they right, will banking profits slid this year?

The big four are fighting to keep profit growth alive

The big four banks will announce their half yearly results for FY16 in February. In just a couple of weeks we will all find out if Finch’s predictions are correct.

But if you have noticed, banks have been increasing interest rates recently.  Sure, the US interest rates have definitely increased. Yet the Reserve Bank of Australia (RBA) has kept our cash rate constant. If anything the RBA decided to cut interest rates early last year. So why haven’t Australian banks kept their rates constant?

The global economic downturn has forced big banks to take different measure to protect earnings. One measure is to increase interest rates. Higher interest rates mean higher repayments. Thus banks are squeezing customers to maintain profit margins.

So Finch could be entirely right in stating banking profits will slow in 2016. There are certainly signs of wavering profit growth. All big four banks have also resorted to other means of gaining a competitive edge.

Commonwealth Bank of Australia [AXS:CBA] was the first to self-promote as the ‘ethical bank’. But this came after a financial planning scandal and acting careless with customers savings.

ANZ Banking Group [ASX:ANZ] are attempting to do the same after being caught out for their unethical culture.  ANZ fired two employees who have now taken ANZ to court, accusing them of promoting culture which encourages misconduct.

It seems banks have to be caught out in bad behaviour before they publicly apologise and make efforts to clean up their act. They can’t just do the right thing in the first place.

What to do about bank shares

We are now almost three weeks into the New Year. So far the S&P/ASX 200 is has already dropped close to 8%, breaking support levels along the way. Now guess which sector heavily influencing our horrible start to the year?

If you had said mining and energy stocks you’d also be right — but I’m talking about the banks. Australia’s big for banks have continued to trend lower. Each one losing more value than the market this year.

ANZ NAB Banks

Source: Yahoo finance

Combining this information with Finch’s prediction, it’s probably not the best time to buy bank shares. Considering that profit growth is looking uncertain for banks, the risk for investing in one of the big four has increased.

Not only are the fundamentals against you in the financial reports, but the banks aren’t technically in your favour either as seen in the charts. Chart knowledge is imperative if you want to know what’s really going on in the markets. If you’d like to know more about reading charts check out Cycles, Trends and Forecasts here.

It’s never smart to buy a stock when there’s clear downwards trends. And the same goes for the opposite, it’s never smart to short sell in an upwards trend.

However these are just general tips for investors. There’s definitely a possibility share prices could trade up towards the end of the week and I could be completely wrong. But just like Warren Buffett, we want to make smart rational decisions, not try to predict the future.

Härje Ronngard,

Junior Analyst, Money Morning

PS: Even the big four banks aren’t a certain investment anymore. The uncertainty surrounding China and the state of the global economy has beaten down Blue-Chip stocks. According to Money Moring’s Publisher Kris Sayce there are five beaten down Aussie Blue-Chips that are a buy today.

Kris has close to 20 years’ experience in analysing stocks. His experience ranges from brokerage houses to leading wealth management firm. But Kris has found his home at Port Philip Publishing. Kris understands that investing your money isn’t easy, especially in a declining market.

In his report Kris will show you the best five Blue-Chips that are oversold. There’s a common denominator that makes these 5 Blue-Chips a buy and Kris will show you how to identify it for the future. To get your free copy today, click here.

Harje Ronngard

Harje Ronngard

With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.

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