Search for long term investment opportunities often leads to a familiar destination, banking sector. Though, while scouting for investment in banking stocks, it must be kept in mind that these stocks are broadly influenced by the same factors affecting shares of other companies, like overall sentiment, valuations and general economic conditions.
Banking stocks are, generally considered to be good for long term investment and for generating passive income in the form of dividends. However, they are prone to getting affected by interest rate hikes and credit default risks.
The banking stocks, in spite of these risks are comparatively safe bets because of the strong regulations, particularly coming after 2008 financial crisis, which at that time had led U.S. banking industry on verge of a collapse. Now banks have to comply with capital requirements and maintain adequate CET1 Ratio, to avert/withstand any financial distress.
The banking industry in Australia is expected to witness transformative modifications over the coming decade. Banks are working to enhance technological presence as digitalisation is already leading to changes in customer behaviour. The banks with the use of latest technology are making their services easily accessible.
Urge to make banking more customer friendly will fuel regular product innovation to stay competitive and could enhance the customer experience and boost productivity. To promote expansion and raising profitability, customers are now being encouraged the use of apps aided by data analytics.
Based on the global climate of high interest rates, banks may be capable of reporting higher margins. Moreover, the world is transitioning quickly from conventional to renewable energy sources, which being capital intensive may open another stream of loan generation for the banks.
With interest rates probably having peaked, the real estate sector may see a resurgence soon. Though Australian property investors have historically received high capital gains returns, increasing rents enabling high rental yields may bring an early cheer to this market and ensure a pick up in home loan growth.
Improving asset quality and better capital adequacy is expected to further help the return ratios of banks. The market having already discounted these positives have resulted in an improvement in the valuations.
Banking stocks not only offer high dividend yields and growth opportunities for investors but are also able to stand up against any economic crisis that may occur in the future.
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