On several occasions Arminius has outlined the difficult competitive landscape which Australia's big four banks have had to face since the GFC. Just recently, the most successful bank CEO of the last two decades has given us an update on the main competitive threats to the industry.

Jamie Dimon has been running JP Morgan Chase (JPM:NYQ) since 2004. JPM is the largest bank in the US with a market capitalization of $600bn, or four times the size of CBA, which is Australia's largest bank. During Dimon's tenure, the JPM share price has increased four-fold, comfortably beating the S&P500 accumulation index as well as the US financial sector. In particular, Dimon guided JPM through the GFC without material damage, because he kept its capital ratios high and avoided risky derivative positions.

Every year Dimon writes a letter to shareholders. This year's letter is a record 66,000 words, available here at JP Morgan Chase. Dimon spends five pages on the challenges facing the banking sector, which we summarize as follows:

• Shadow banks provide more credit to the US economy than regulated banks - USD18.4tn versus USD10.5tn. Lack of regulation means that shadow banks enjoy important advantages, such as lower costs, lower capital requirements, and lighter "know your client" and anti-money-laundering obligations.
• The size and strength of unregulated competitors in the banking sector is increasing as the giant tech companies expand into banking functions. For example, Alphabet (Google), Amazon, Apple and Facebook all have cash reserves in the billions as well as market capitalizations in the trillions.
• Fintech start-ups funded by deep-pocketed venture capitalists are trying to build their competitive advantages and capture market share in specific areas of banking services - such as payments, data management, and mortgage origination and approval - by creating products which are faster, cheaper, or intuitively simpler to use.
• Most bank information technology (IT) is based on legacy systems which have been linked together by subsequent patches and fixes, with the result that processes are slow and data cannot easily be shared across platforms. By contrast, modern cloud-based IT systems are cheaper, faster, more efficient and more flexible.
• Over the last twenty years, the importance of US banks as credit providers has steadily diminished due to these competitive disadvantages. Unless there is regulatory change, the market share of US banks will keep on shrinking.

In conclusion, we point out one risk factor which Jamie Dimon did not mention. The world's central banks are planning to introduce their own digital currencies over the next five years. China's central bank is already trialling its digital renminbi with ordinary citizens. In order to encourage individuals to quickly spend any digital renminbi that may be distributed as part of a stimulus package, the Chinese central bank is considering placing a used by ("must be spent by") date on the digital currency. The government can control when it can stop being used in order to encourage immediate consumption increases in the Chinese economy, as opposed to the stimulus recipients "saving" the digital currency. The implications for commercial banks are not yet known, but they are unlikely to be favourable.

What does all this mean for shareholders in the big four Australian banks? When the Australian economy reaches a post-coronavirus "new normal" in late 2021 or early 2022, the banks will still face the type of hostile environment which has kept their share prices below their 2015 peaks. We recommend that bank shareholders stick with the sector for another six months. After that, they should sell down with a view to re-deploying the proceeds into sectors with better growth potential.

Q.E.D.