Even Insiders Agree the Big Banking Model is on its Way Out

As regular readers will know, I’ve been banging on about this for months…

But, it’s one thing me saying it.

And quite another when the target of your ire comes straight out and admits it to the world!

Which is exactly what just happened…

You see, Australia and New Zealand Banking Group Ltd [ASX:ANZ] CEO, Shane Elliott, told the Intersekt fintech summit last week in Melbourne (my emphasis):

Despite what you read in the papers, bank profitability has been under threat.

Return on equity has halved over the past 15 years. NIMs [net interest margins] have halved over that period. We are now much closer to our cost of equity.

The ability to hold the machine together as it is … I have a more aggressive view that that is unsustainable.

I think the idea of, you know, that … these universal, mass-market banks are going to continue to thrive, I don’t agree that that’s the case. I am not saying there’s going to be none, but I don’t believe that this is sustainable in the future.’

There you have it…straight from the horse’s mouth.

The big banking model is on its way out. Not even the insiders think it’s the way banking will be done in the future.

This could have some big implications for you…

Should you worry?

If you’re a shareholder relying on stable bank dividends to help you pay the bills, then you need to pay attention.

Today, National Australia Bank Ltd [ASX:NAB] is paying a 5.7% dividend yield after taking into account the benefits of franking credits (the refunds on tax already paid, a major focus point at the latest election).

But not even franking credits will save you, if cash-strapped banks start to cut their biannual payout to shareholders.

Which is very likely if profits start to fall as the ANZ CEO alluded to earlier…

If you’re a bank employee this should definitely concern you.

The trend around the world is all about cutting staff. Global giant HSBC has plans to cut 10,000 jobs and Deutsche Bank 18,000 in the months ahead.

As branches close and new technology starts to play a more prominent part in customer interactions, this is only set to get worse.

Westpac Banking Corporation [ASX:WBC] has already cut 67 branches across Australia this year. And ANZ has shut 20 across Victoria and South Australia.

Expect this trend to continue…

Funnily enough, mortgage holders and savers at the big banks should also be concerned about declining bank profitability.

Already under fire for not passing on rate cuts in full, I expect banks to ignore the political pressure in favour of trying to make more money!

You can’t blame them, that’s what private businesses do after all.

Which means they’ll reduce the already pitiful returns on savers’ interest rates by as much as they can, while at the same time refusing to pass on the full rate cuts to borrowers.

Now here’s the thing…

If you fall into any one of these camps and you’re not happy about it, you do have a choice. But you have to be brave enough to take it.

What you can do to protect yourself

First up, shareholders…

Now I’m not saying to sell all your bank shares. Indeed I give you no formal advice here, only my thoughts.

But if it were me, I’d look to diversify some of my portfolio into the upstarts that are tearing down the big banks.

Again, it not just me saying this, it’s what the ANZ CEO thinks too.

From the AFR:

Interviewed on stage at the Intersekt fintech summit in Melbourne on Wednesday evening, Elliott covered a wide range of topics, and even revealed that if he were setting out to disrupt the banks, he would focus on small business customers.

“Small businesses need their banks every single day,” Elliott told the crowd. “You are actually embedded in the way they operate. It’s very different to business to retail or home lending, which is a very kind of episodic relationship.”

That should be music to the ears of investors in companies such as Prospa [ASX:PGL].

To be clear, not every fintech idea will succeed. But the ones that do are poised for glory…

Fitnech stocks like Afterpay Touch Group Ltd [ASX:APT] have shown what’s possible and in turn made their early backers a mint.

Check out this free report to discover three of the most exciting fintechs on the ASX today, how they’re taking on the big banks, and what it could mean for forward thinking investors.

Then there’s the workers…

Employees are stuck in a tough position. And the right decision here depends on a number of factors. Which boils down to try and see it out, or jump before you’re pushed.

In my experience you’re better to make plans early, unless you’re in line for a big payoff and it’s worth sitting out the inevitable.

And lastly, bank customers…

The answer here is simple.

If you’re not happy, move your banking.

There’s a plethora of challenger banks launching in Australia over the next 12 months. And a lot of the time they’re offering better rates for savers and lower rates for borrowers.

Phone your bank and tell them what you can get elsewhere. If they don’t match it, move. But this can’t be a bluff, you’ve got to follow through.

And funnily enough, a lot of the companies that will attract this potential big bank exodus are the same ones that might make good investments. And in turn create new jobs.

There’s no doubt in my mind…

The ‘Great Bank Unbundling’ is happening, my friend.

The ANZ CEO just told you!

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: Find out why bank dividends could be under serious threat in this free report.


Ryan Dinse is an Editor at Money Morning. He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur. With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle. Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.  


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