Big 4 Banks: Cannot be beaten, so consider joining

So far, 2 (Westpac and CBA) out of our 4 major banks have lifted interest rates in response to increased capital requirements.

The banks are unwilling to cede any ground when it comes to profitablilty. If adverse circumstances arise, they just increase their margins by jacking up rates.

We have a unique banking industry in Australia - dominated by 4 huge financial institutions protected by the Federal Government's 'Four Pillars' policy. It is amazing that a country wth just 0.33% of the world's population has four of its largest banks. All four of our big banks are inside the world's top 30 (ranging from the CBA at 11 to NAB at 26 as measured by market capitalisation).

Basic economics tells us that when a marketplace is dominated by just a few players, the resultant lack of real competition leads to above average profits. This rule certainly holds true for Australian banks as they continue to churn out annual profits in the billions. The banks also produce rivers of cash, which means their dvidends are reliable and strong. Currently, the banks are paying dividends of around 6%p.a. However, when the imputation tax credits attached to those dividends are factored in, the pre-tax dividend is actually 8.5%. This is nearly triple the current term deposit interest rate. Of course, a bank dividend is not guaranteed and carries more risk than term deposit interest. However, with such great income returns on offer, long term investors should consider giving up complaining about the banks and just join them by becoming a shareholder. 

Link to article in the Melbourne Age 22 October 2015: http://www.theage.com.au/federal-politics/political-news/westpac-and-the-commonwealth-bank-protect-their-mortgage-profits-no-matter-what-20151022-gkg3qp.html

UPDATE: Since writing the above, ANZ and NAB have also lifted their interest rates.

Please note: These comments are for general interest only. Investors should seek professional advice before making any investment decisions.