Growth Across the Banking Sector

Increased regulation and mounting bad loans. That’s what faces Australia’s banking sector.

Aussie banks aren’t in great shape. The first quarter of this year saw all banks, except National Australia Bank [ASX:NAB], disappoint. ANZ Banking Group [ASX:ANZ] was the worst performer by far. It slashed dividends as profits fell 24%, to $2.8 billion.

A UBS analyst recently commented on Australian banks’ return on equity (ROE). ROE is a key measure for profitability, and a metric many investors use for assessing value in stocks. For Australia’s Big Four, ROE is now worse than 2009 levels. This year, ROE was down to 14.9%. Just last year, that same figure was 15.7%.

Of course, no one expects Australia’s banking system to topple over. But the UBS bank analyst did believe ‘there are limited prospects for growth or higher returns over the short to medium term.

I disagree. Bank profits are lacking and, right now, they’re doing anything to pump these numbers up. But when faced with a problem there’s always an opportunity for a solution.

If profits cannot be increased through conventional measures, like increased lending and leveraging positions, banks will turn to something else. And technology could be the answer they’re looking for.

Become digital or obsolete

Already, financial technology (Fintech) has become hugely popular among investors. It’s believed that European and US bank will cut 1.7 million jobs in the next decade. And it’s all due to advances in financial technology. Fintech has already branched into lending, investing, payments and many other banking operations.

Citigroup recently released a 108-page report looking at where Fintech companies are deploying their resources. Citi’s research found that lending was a key battleground. It accounted for 46% of the US$19 billion in private Fintech funding over the past six years. The next biggest was the payment system, accounting for 23% of the investment in Fintech.

Lending and payments are both profitable activities for banks. And losing market share in both of these might create more pain for banks.

And with interest rates as low as they are, banks’ profitability is being crippled. It’s almost impossible for them to increase revenues significantly. That’s why many are saying that banks may need to take an ‘adapt or die’ approach.

But when it comes to investing in Fintech, investor might be under the misconception that they need to be small startups. Not true. Companies like PayPal Holding Inc. [NASDAQ:PYPL] and LendingClub Corp [NYSE:LC] are both valued at over $1 billion. And they’re both considered to be within the Fintech sphere.

So don’t think of the banking sector as old and broken. Instead, think of the opportunity that lies within the solution.

Härje Ronngard,

Junior Analyst, Money Morning

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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