Managing risk will be crucial when investing in major banks while growth rates are likely to be relatively flat, according to Merlon Capital Partners.
Merlon said that over the next three years, growth rates for the major banks will be more subdued, at about half the level recorded prior to the global financial crisis (GFC).
"Between 1995 and 2007, banks actually achieved earnings per share (EPS) growth of 11 per cent per year, which is incredibly strong for those 12 years at a core earnings level," Merlon chief executive and lead portfolio manager Neil Margolis said.
"The outlook for the next three years is around half of this level - about 4 to 5 per cent."
"This earnings growth is predicated on systems credit growth being at or around GDP rather than above GDP."
Mr Margolis said the market share of banks is unlikely to increase since an improvement in the economy will ease funding pressure and will allow major bank competitors to re-enter the market competitively.
Revenue per share, which has been weak for the past four years, is also unlikely to improve significantly, which will also contribute to subdued growth.
Merlon said high deposit rates, flat margin outlooks and consumer aversion to debt could also impact the growth of banks over the short term.
"The consumer aversion to debt might have a bit longer to play out, although ... business credit growth can recover quite quickly and is very impacted by confidence," Mr Margolis said.
"Businesses have probably been underinvesting so we might see business credits on the upside if sentiment continues to improve, but I think investors will be cautious for some years yet."
Merlon has said that while banks are valued fairly compared to other stocks and have certain dividend yields, the downturn in the market means the fund manager will focus their investments on managing risk.
"One would have to conclude the quality of the sector, in terms of qualitative characteristics and industry structure, is very high," Mr Margolis said, "but the current valuations in our view don't compensate for the heightened macro-risk in the short term, or the subdued growth prospects."
