It can be hard to avoid the big banks if you're a sharemarket investor.
It can be hard to avoid the big banks if you're a sharemarket investor.Thanks to their dominance and knack for paying generous dividends, the leading banks make up four of the 10 most popular stocks.But in these fragile times for the world's financial system, the banks also face plenty of challenges.The product they sell, credit, is seriously on the nose. Annual growth in mortgage lending is the slowest it has been in more than 30 years as households adopt a far more cautious approach to their finances.There is also the lingering risk of financial strife in Europe, which would impact their ability to raise money from overseas.It may therefore come as a surprise that investors have been taking an increasingly positive view on bank stocks in the past few months, as shown in the graph.What's behind this recent strength? And is it a sign of brighter times ahead for the big four?According to the Reserve Bank, banks are now better prepared to manage risks than they were during the global financial crisis, and this could be a reason for the recent strength.For starters, local banks have little direct exposure to the troubled eurozone, holding just 0.7 per cent of their assets in the region.Second, they have sought to address a vulnerability that emerged during the GFC, by replacing some of their cheap funding from global markets with more stable deposit funding.These changes mean the banks would be better prepared to cope with another GFC, regulators hope.But when it comes to future profit growth, the Reserve Bank says things aren't quite as rosy for the banks, which made a combined $11 billion in the latest half year.While this is a huge number, revenue is slowing or even shrinking among the majors, because people aren't increasing their borrowing at the rate they once were.At the same time, the move to obtain more funding from deposits is pushing up costs and competition for customers is pressuring margins.All up, the banks have addressed some of their weaknesses, but the boom days of rapid profit growth could be behind them.
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