For decades the not so secret investment rule was that you got a better yield by investing in banks than by depositing funds with them.
That may still be the case but it would be a mistake to take the current generous dividend yields paid by the big banks and simply extrapolate them into the future.
They may still yield more than the term deposits they offer inside the bank but the dividends paid by the banks are already coming under pressure.
Royal commission leads to penalties and compensation
Following the financial services royal commission, the big banks have had to pay out billions in penalties and compensation, and with their fee structures also coming under the microscope and interest rates at record lows, analysts say the banks will struggle to maintain their profitability and dividend levels.
Analysts at investment bank Macquarie found that the Commonwealth Bank (ASX: CBA) and ANZ (ASX: ANZ) were most likely to be affected by fee reductions than National Australia Bank (ASX: NAB) and Westpac (ASX: WBC).
They expect underlying fees at each bank to contract by $350 million to $650 million between last financial year and 2020-21, compared to a total banking sector fee pool of $12.98 billion last financial year, as assessed by Australia’s Reserve Bank.
Fees under pressure
The fees coming under the most pressure included penalty and exception fees which customers can be charged for if they do not have enough funds to cover direct debits.
“We expect regulatory pressures and a more focused approach on customer outcomes to put pressure on these fees,” Macquarie found.
Macquarie also found that the environment for fees would continue to be challenging – quite a reversal from the salad days between 1997 and 2007 when those fees were rising by an average 13% a year.
Since 2008, fee growth slowed to single digits and is now expected to turn negative – particularly as ATM charges also dry up due to the popularity of tap and go transactions.
Depositors fighting for higher rates, borrowers for lower rates
Banks are also feeling the squeeze on the interest rate front as they are being pressured by both sides of the equation.
The Reserve Bank has been cutting official rates to a new low of 1% and the banks have struggled to pass through those cuts to their massive existing principal and interest loan books.
Loan customers are waking up if they are on an uncompetitive loan rate and are contacting banks directly to ask for lower rates and if they are not granted, are taking their business elsewhere.
The deposit side is just as tough, with banks fighting to retain term deposits and at call accounts unless they pay competitive interest rates.
Analysts including Macquarie think that deposit and loan margin squeeze could add to the pressure on the banks as margins and profits suffer.