"Australian household lending – mortgages, credit cards and other personal loans – has been the key contributor to Australian bank profits over the past decade," analysts Andrew Lyons, Jien Goh and Yu Chuan Leong said.

"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."

Goldman Sachs warned that ageing Baby Boomers (those born between 1946 and 1964) who are paying down debt and saving more through deposits and superannuation would be a significant headwind to household debt growth.

This impact was compounded "by households whose debt-to-income ratio is already the highest in the developed world and whose debt burden will become uncomfortably high as rates rise", the analysts said.

The bank also believes the global and Australian push for banks to hold more capital will cut mortgage profitability by one-third and drag return on tangible equity (ROTE) by 2 per cent to 3 per cent.

"We believe Australia will be no exception to the global regulatory push for higher capital requirements," the analysts said. "We believe the Australian Prudential Regulation Authority could increase domestic advanced bank mortgage risk weights to a floor of 25 per cent from 17 per cent, increase capital requirements for banks by 1 per cent and remove the double gearing benefits the banks currently enjoy within bank wealth subsidiaries."

Cuts in mortgage profitability 

This would mean the banks would need to raise an extra $27 billion in additional capital, endure cuts in mortgage profitability by one-third, and lose 2 to 3 per cent from their ROTE.

Banks would try to maintain profitability in the face of these headwinds by lifting mortgage rates on top of any changes to the Reserve Bank's cash rate, the analysts said. This would keep household debt growth to between 3 and 5 per cent over the next 15 years.

"We now forecast about 4 per cent mortgage credit growth versus 5 per cent previously over the medium term."

ANZ continues to be rated a buy and Commonwealth Bank a sell by Goldman Sachs, which has also maintained its neutral ratings on National Australia Bank and Westpac. It has also maintained neutral ratings on Bendigo Bank and Bank of Queensland.

"Our preference across the banks sector remains ANZ," Goldman Sachs said. "The bank's Asian growth strategy provides it a growth lever outside the domestic economy, which we expect to be more adversely impacted by ... demographic headwinds."

On the other hand, "our least-preferred bank across the sector remains Commonwealth Bank. The bank is the largest Australian mortgage lender and has around 60 per cent of its loan book ... derived from domestic housing.

"As a result, we believe Commonwealth Bank is exposed to ... demographic headwinds. Further, Commonwealth Bank's valuation remains un-compelling."

Goldman Sachs slashed the target prices for ANZ by 6.5 per cent to $36.98 (it is trading at about $32), Commonwealth Bank by 4.3 per cent to $81.13 (trading at about $86), and Westpac by 5.8 per cent to $35.28 (trading at about $32.)