The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has given up its early gains to be trading slightly lower towards the end of the session, driven by companies such as Woolworths Limited (ASX: WOW) and the major banks, each of which have recorded considerable losses over the last week.
In the last five trading sessions, Australia and New Zealand Banking Group (ASX: ANZ) has fallen 3.4%, Commonwealth Bank of Australia (ASX: CBA) is down 2.2%, while National Australia Bank Ltd. (ASX: NAB) has been hit the hardest, down 3.9%. Westpac Banking Corp (ASX: ANZ) fell a more respectable 1.4%, although it has still fallen roughly 19% since peaking at $40.07 early last month.
Given that almost every Australian investor is exposed to at least one of the banks (whether it be in their personal portfolios or through their superannuation funds, etc.) it's worth taking a look at some of the major reasons why the banks are all falling like flies…
- Each of the banks delivered their latest earnings reports earlier in the month which showed that profit growth is becoming increasingly difficult to achieve. Investors are likely becoming concerned (indeed, all of them have arguably been priced to perfection for years) by the lofty premiums commanded by each of the major lenders' valuations.
- Interest rates are low, and are likely to stay low for the foreseeable future. But the market is beginning to question whether the RBA will lower rates any further which has had a positive impact on bond yields. Investors are likely seeing these as more of a reasonable alternative to the banks' dividends – considering how expensive the shares had become.
- Bankwest, which is backed by Commonwealth Bank, announced it would start capping investor loans at an 80% loan-to-value ratio. National Australia Bank has also made changes in response to the Australian Prudential Regulation Authority's (APRA) request to limit investor loan growth to below 10% p.a. in the latest sign that lending standards are only going to get tougher. Low credit growth would be bad news for the banks' profits, and their ability to continue raising dividends.
- To expand on that point, each of the banks are likely to be forced to raise more capital (Westpac and NAB already have) to protect against an economic downfall, which could further impact their ability to grow dividends.
Even at their current prices, the banks are by no means cheap investment prospects. In fact, they're still expensive by nearly every valuation measure, making them poor long-term options right now. Luckily, there are plenty of other great dividend stocks presenting as excellent value right now.