There’s a lot of pain going on in the ASX bank share sector right now, with a number of banks across the US and Europe facing difficulties.
For people that want to invest in banks, then this could be an opportunistic time to consider investing.
Fear in the markets is when the best prices can pop up. There are certainly some lower-priced banks at the moment.
Why I’m not interested in ASX bank shares
Some of the biggest businesses in Australia are banks. However, just because they’re big today doesn’t mean that they’d be good long-term investments.
One of the main ways that banks earn profit is by making a margin on its lending to borrowers. The loan interest from borrowers is revenue, while the cost of the lending is the funding of that loan, such as customer deposits in bank accounts and term deposits.
Banks used to earn net interest margin (NIM) of more than 2%, but that reduced as competition increased. Banks have been given a boost by the rapidly-rising official RBA interest rate. But, I expect NIMs will fall again as banks have to compete for savings and borrowers.
It used to be that banks needed an extensive branch network and various other elements to become a successful competitor in the banking space.
But, the online banking revolution, combined with more borrowers using brokers, has led to it being a much more even playing field. Macquarie Group Ltd (ASX: MQG) has rapidly become one of the larger players in the sector, and it hasn’t needed a branch network to do it.
There are various smaller lenders, including non-banks, that are able to offer loans that seem identical to the loans offered by big banks. If the large ASX bank shares want to keep their market share, then they need to compete on the loan rate, which would likely end up reducing profit.
The banks are still earning billions of dollars of profit. But, I don’t think that Commonwealth Bank of Australia (ASX: CBA) has the same competitive advantages that it used to.
In other words, loans seem more like a commodity product than they used to be. Banks also face higher arrears from here, in my view, with the much-higher interest rates.
Final thoughts
I’m certainly not suggesting that ASX bank shares are about to go to $0. Good dividends will probably continue. But, I don’t think they can deliver market-beating returns over the long-term. I’d rather invest in Vanguard Australian Shares Index ETF (ASX: VAS) than own many of the banks as an individual investment.
