GOLDMAN SACHS: Australian bank profits are being hurt by 'demographic headwinds'

‘Victoire’ in the 2011 Audi Sydney Sailing Regatta in Sydney.

Australian banks, riding the wave of low interest rates and strong mortgage lending, hit all their all-time highs in March and April this year.

Their stock prices have since come under selling pressure as the market reassessed the impact of expected issuance of new capital, to meet increased regulatory requirements, and its impact on earnings per share.

That saw all 4 major banks sell off to early June lows. Since then the banks have rallied again with the Commonwealth Bank ending trade yesterday at $86.30. That leaves the bank up more than $6, or 8%, since the low on June 10 but still $10 below the high of the year that the bank’s stock price hit in March.

This rally looks like a selling opportunity according to new research released by Goldman Sachs, as reported by Fairfax Media this morning. Goldman says the key driver of bank profitability over the last decade, household borrowing, looks set to slow.

Australian household lending – mortgages, credit cards and other personal loans – has been the key contributor to Australian bank profits over the past decade.

However, we now believe the era of high returns from Australian household lending insulating bank profitability is coming to an end, driven by shifting regulation and an ageing and fully geared population.

Of the major banks Goldman believe the Commonwealth is the most exposed because its the “largest Australian mortgage lender and has around 60 per cent of its loan book…derived from domestic housing.” That makes its valuation “uncompelling.” On the other hand, Goldman likes ANZ because of its Asian strategy.

While Goldman cut its price targets for the sector, ANZ and Westpac are still expected to rise from current levels but the Commonwealth is trading around $5 above the new target at $81.13.

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