A speech this week by a senior executive at the Reserve Bank should force all investors to reassess their holdings (if they have them) in Australian banks
In short, if you are looking for capital gains in the next three years from bank shares, which dominate the local market, then think again.
And if you are income driven, the banks will find themselves under increasing pressure to drive earnings higher, putting a question mark over hopes for a return to the dramatic rises in income we saw before the financial crisis set in 2007-08.
The signs of the coming strains are there already.
In fact, apart from the falling bad debt provisions, the banks struggled to boost revenues and especially earnings, in their most recent reporting periods or updates.
The RBA’s Assistant governor in charge of financial markets, Guy Debelle revealed the problems for the banks in a speech to a Sydney finance conference this week.
Mr Debelle pointed out that Australian banks would experience a turnaround in their business mix in coming year.
Instead of revenue growth exceeding deposit growth, the reverse looks like happening, which will put downward pressure on interest margins and profits.
As the above graph shows, deposit growth has been outstripping bank lending now for more than two years, and that looks like continuing on for several more years.
That means earnings growth will become harder to sustain and it wouldn’t surprise if the banks start cost cutting and out sourcing to protect their margins.
This turnaround will happen before the banks have to boost their liquidity reserves ahead of new rules to start in 2015.
Mr Debelle said that for most of the past 20 years banks had enjoyed demand growing faster than the growth in deposits, which is why they turned to the wholesale markets to support this rapid growth in lending that was coming from business and home buyers.
"Australia’s relatively high level of investment, and the sustained growth momentum of the economy over the past two decades, underpinned the demand for credit.
"While the source of the demand for credit shifted between household and business sectors, from the early 1990s recovery until the financial crisis, aggregate credit growth was sustained at a rate of over 10 per cent per annum.
"At the same time, on the supply side, the importance of superannuation in Australia has, for much of the past few decades, constrained the growth in household deposits.
"Superannuation funds have historically tended to invest in wholesale bank paper rather than hold bank deposits.
"So, compared with other countries, more of the savings of the Australian household sector has tended to end up in wholesale bank paper rather than in deposits, with the superannuation sector as the intermediary."
But he said that had changed with the GFC
"More recently, however, the demand for credit from households and businesses has slowed in tandem.
"For businesses, the reduced appetite for debt was initially due to a desire to strengthen balance sheets.
"More recently, strong profitability, most obviously in the mining sector, is ensuring many segments of the business sector have sufficient internal funding to meet their investment needs.
"So banks have experienced a slowdown in asset growth and have funded the assets with a greater share of deposits.
"A consequence of this is that wholesale debt issuance by financial institutions has declined to its slowest pace since the mid 1990s.
"The most pronounced slowing has been in the issuance of short-term debt as banks have sought to lengthen the average maturity of their funding by increasing the share of long-term debt in total funding.
Now Mr Debelle says this situation could very well continue for "some period to come."
"In particular, if one thinks about the composition of growth in Australia in the period ahead, it is likely to be investment-intensive.
"But much of that investment is likely to be funded by companies which are cash-rich or tap global capital markets directly.
"This means that the growth in the economy in the period ahead may be associated with less growth in business credit than has been the case in the past. It is also likely to boost deposit growth.
"So banks may be seeing a prolonged period of faster deposit growth but slower asset growth."
Helping drive this is the growing caution of households that has helped boosted savings (and hurt retailers, such as Myer)
"This growing caution of households in the past few years has seen the household saving rate pick up substantially, and much of this saving has been in the form of deposits, given the attractive yields on offer.
"The strong cash position of many businesses is also contributing to stronger deposit growth. As a result of these factors, deposit growth has outpaced credit growth for the past two years."
If growth in business lending will be weak, so too will home lending.
Banks can reasonably expect to grow mortgage lending by around 6% a year.
Any more would be hard without some help from things like first home owners schemes.
In fact the big four banks have all noted that getting growth in mortgages will be tough, so all four have actively tried to boost business lending, and have said th
