You could be forgiven for having stood on the sidelines recently wondering whether to buy shares in the big Australian banks, but some of the planets are starting to line up on the positive side.

Seldom in the past few decades have banks been as much under the gun as they were in the Hayne Royal Commission, and rightly so, as it turned out.

So, looking forward, is this a good or a bad thing?

That depends on two things: one, just how much reparation are they going to have to shell out and two, have they learned their lesson?

I’d stick my neck out and say that some of the class actions by people complaining that the banks underestimated their outgoings are a bit hopeful, for instance. If they got carted out that’s a shame but what happened to the doctrine of personal responsibility? The borrower’s equivalent of caveat emptor?

The number of people who went bad after their loan applications were incorrectly filled in is just a fraction of the number who repaid their loan as required.

As far as learning a lesson is concerned, nothing focuses a banker’s mind so much as having to pay out millions of dollars to atone for sins past. They spent a while behaving like rabbits in the headlights and now they’re starting to work it out.

Until the Election, it was almost a default position for the mainstream media to write articles imposing sackcloth and ashes on the banks, given the egregious behaviour uncovered in terms of charging dead people for advice et cetera.

But the banks’ outlook has brightened since then, thanks to a couple of imminent measures and a near certain drop in interest rates at the next RBA meeting on June 4.

The most dramatic effect was on Monday May 20, the first trading day after the election, when the entire banking sector staged a rally of close to 10%.

That wasn’t the result of a lightning reappraisal of the banks’ medium-term outlook, it was the result of a mad scramble by short sellers to cover.

It was fun for existing shareholders to see, for instance, Westpac jump more than 10% in two days, most of that as soon as the market opened after the election. It didn’t feel like the real world but by and large those prices have held since.

Why do we love bank shares? Let me count some of the ways.

One, in letters of fire, is the benefit of fully franked dividends. That for instance turns NAB’s 7% dividend yield into a grossed up 10%, a return you would be nuts to go past if you are a “buy and hold” investor, which is what most of us are despite claims to the contrary.

And as we learned at the Election, Labor’s defeat means it will be at least three years, if not more, before the notion of abolishing franking refunds for zero taxpayers ever comes up again.

Two, and this is more controversial, we love them because lots of Mums and Dads love them (as in, see above), and because they make up such a big element of our market.

That means investors rush the banks because everyone else is rushing them, which isn’t actually a justification but it does mean the Trend is your Friend.

At the moment, financial stocks represent just over 30% by value of the ASX200, which in turn represent over 80% of the overall share market by valuation. The next biggest category, Mining stocks, is only just over half the size at 18.3%.

Next, APRA has decided to relax the requirement that new mortgage borrowers should be able to service an interest rate of 7%, well above current levels. That has to help new lending and it’s the banks that have been agitating for a cut.

The banks’ fortunes will as usual be dependent on home lending, and it’s interesting to note that the auction clearance rate in Sydney jumped last weekend to 69.9%, the highest rate since April last year, and the national average was 62.6%.

The property brigade reckon anything above 50% represents a stable market, but on a less bullish note it’s also clear that we haven’t yet experienced the full washup for the overall 10% drop in Melbourne and Sydney property prices over the last 12 months. Mortgage stress has not yet turned into loan delinquency but you’d be a fool to suggest it won’t.

The Morrison Government’s proposal to replace mortgage insurance for some 100,000 first home buyers with a commitment to underwrite the difference between first home buyers’ 5% deposit and lenders’ requirement for 20% is another move that looks exciting at first glance.

But it remains to be seen how motivated the banks will be to welcome first home buyers who are going to have to borrow not 80% but 95% of the property price.

I’d put that down as a neutral factor since, underwritten or not, we don’t want to see banks’ bad loan percentages climbing to any measurable degree.

The bankers might like to have potential losses reimbursed but they would prefer not to endure the losses in the first place.

What other negative factors are there out there?

Failure to maintain the dividend is the biggest bogey.

The banks already have a high payout ratio at around 82% and, given profits are likely to ease in the short term  because of remediation costs and other rationalisations, they may be tempted to pay out an even higher percentage.

Choosing between a higher payout ratio and cutting the dividend looks an uncomfortable prospect, to be frank, so there may be another shoe to drop there.

Where are the banks going to find new sources of profit?

Aside from new home lending, that’s a hard one. They’re all ready for the looming drop in interest rates, with the official rate likely to drop to 1.25% on Tuesday June 4, but the big question is, where will they get cheap finance?

Our wobbly dollar isn’t helping them with any chance of raising funding offshore.

Our 10-year bond rate is now at 1.7% but the US equivalent rate is now 2.2%, so there won’t be a lot of bargains there.

Our Bank Bill Swap Rate (rate at which banks lend to each other) most recently dropped from 1.65% to 1.56%, which infers cheaper funding locally, plus of course bank deposits are substantial despite the miserly rate of interest they pay…and getting more miserly.

If the banks can maintain a 200-basis point margin on their home lending they will be doing very well, but there are no guarantees on that score. Put simply, if everything goes well they should be able to maintain margins, but maybe not grow them.

Conclusion: as a long-term bet the banks are probably a safe place to go but don’t go chasing them: there are some breezy headwinds looming in the medium term in areas such as dividend maintenance and finding new sources of profitability.