Whether you are a seasoned investor or just someone who watches the news on a regular basis, chances are you have heard of Australia’s “big four” banks. You might even be a customer of theirs now, or you may have been in the past. From mortgages and loans to everyday banking and business operations, the big four play a massive role in the way money is handled around the country.
But, does that make them a good investing option for you? Read on to learn a little more about these influential institutions, why they have been a popular choice for some investors in the past, what their future might hold and what you might want to consider when trying to figure out if they are a good option for your portfolio.
Which are the big four banks in Australia?
The big four banks in Australia are:
- CommBank (CBA), also known as Commonwealth Bank. It was founded in 1911 and has its headquarters in Sydney. Commonwealth Bank offers a range of financial services, including retail, business and private banking, commercial and wholesale banking for larger organisations and wealth management services. It made its debut on the ASX in 1991, in what many consider to be Australia’s first large-scale privatisation. Commonwealth Bank is known for paying dividends every year.
- Westpac Banking Corporation (WBC), also known as Westpac, has roots that go all the way back to 1817 when it was called the Bank of New South Wales. It is Australia’s oldest bank, and was renamed Westpac in 1982. Other popular banking entities including St. George, BankSA and Bank of Melbourne all fall under the Westpac umbrella. Westpac also pays dividends to those who hold its bank shares.
- National Australia Bank (NAB), also known as NAB, is recognised as the country’s largest business bank, working with companies of all sizes. It also provides personal banking services and wealth management offerings and is a dividend payer as well.
- Australian and New Zealand Banking Group (ANZ), also known as ANZ, was founded in 1835. It is headquartered in Melbourne and is largely known for its commercial and retail banking services. It has paid dividends for more than 30 years.
These four institutions are all part of the banking sector, which falls under the financial industry of the ASX. Each of the big four banks is a member of the ASX 200.
Learn more about the Australian stock market and its industries and sectors in our Guide to the ASX.
Why have people invested in Australia’s big banks in the past?
For years, banks have been a key element of many investor portfolios, with Australians putting more of their trading dollars into bank stocks than any other type. Here are a few reasons why this might be the case.
A strong track record of success
A history of rising share value can be one of the biggest attractions for investors, and bank shares in Australia have more or less shown exactly that. For years, the banks have been a solid foundation on which portfolios are built. This is partially due to Australia’s relative economic strength in recent decades, during which the country did not see a recession for nearly 30 years until the COVID-19 pandemic.
A history of dividends
Dividends are another attractive aspect of Australian bank shares for many investors. As mentioned above, each of the big four banks usually pays dividends multiple times a year. These franked dividends can be a nice complement to solid bank share prices for many in Australia.
A relative lack of volatility
Big four bank shares in Australia might not tend to have the extreme short-term growth potential of other stocks, but they also are unlikely to have the bottom fall out of them as suddenly, either. Many consider these defensive stocks, which means investors believe they can generally count on returns even when the market is not as strong and other stocks are struggling.
What might the future hold for bank shares in Australia?
While big four bank shares have been relatively stable outside of a recent COVID plunge, there are some big factors that could potentially impact their future.
One is the potential for disruption in the industry. As more and more fintech apps and platforms are created, customers might look to alternative outlets for their banking and lending needs. This could potentially hurt big four bank share prices. However, digging a little deeper, this might not end up being an issue because many of these fintech services are actually backed by major banks.
The lasting impacts of the COVID-19 pandemic could also continue to affect the value of bank shares in Australia. While the worst of the crisis is hopefully behind us, the aftershocks of Australia and its businesses falling into their first recession since 1991 will still be felt for a while. These aftershocks could include companies being unable to pay back loans and low interest rates that impact bank profitability.
And, last but most likely not least for many investors, is the future of dividends from bank stocks. This usually reliable source of value was heavily impacted by the COVID-19 pandemic, with regulators capping dividends during the recession. Banks were able to start paying dividends again in August 2020, although they were lower than shareholders were used to. How quickly these dividends can get back up to previous levels could play a big role in the performance of big four banks stocks.
Should you invest in bank shares?
Here are some things to consider when deciding which bank shares to buy, if any at all. You might notice that some of these steps mirror those you would take when investing in stocks of any type.
- Do your research. Understanding recent performance and the factors that could impact the bank — both positively and negatively — is a good place to start when it comes to researching which bank shares to buy. Have there been any major controversies, or are there any government regulations on the horizon?
- What is your timeline? While each investor should decide which strategy works best for them, many who invest in bank shares do so with a plan to hold onto them for the long haul. If you are looking to make quick returns, bank shares might not be the best idea.
- Look at the numbers. Even if you are not a metrics wiz, there are a few stats to look into that can help inform your investing decision. Price-to-earnings ratio (the current share price compared to how much a company earns per share), efficiency ratio (how much a company spends versus its revenue) and return on assets (a comparison of the value of a bank’s assets to its profit) are three of the most popular ones.
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