The share price of Australia and New Zealand Banking Group (ASX: ANZ) has slumped to its lowest level since 2012 in trade today as investors head for the exits on growing concerns over the bank's short-term outlook.
First up are concerns the bank's Super Regional strategy of aggressively growing its footprint in Asia may backfire. The bank has long aimed to source more than 25 per cent of earnings from outside the ANZ region by 2017, although critics worry that Asian markets are high risk even for vanilla banking activities and that the bank's Asian exposures may act as an increasing drag on group profitability.
The other big issues boosting the bear case around ANZ Bank at the moment are also affecting the share prices of its Big Four peers like Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA).
Many investors are worried that Australia's residential housing market is set to take a tumble, which would undoubtedly be bad news for the share prices of banks like ANZ, with bad debts rising and loan book growth shrinking.
Investors are also worried about the greater capital adequacy requirements being forced on the banks by supranational regulators determined to avoid a repeat of the GFC-style problems where banks had no alternative but to go bankrupt, or seek government bailouts after credit markets dried up and bad counterparty debts ballooned.
Banks turn profits by making more on what they lend than they pay on what they borrow, while keeping some capital in reserve for a rainy day. However, the more capital they are forced to keep in reserve by regulators the worse their return on equity and profitability.
This in turn has a knock on effect on share prices, especially if investors believe the effects of the higher capital adequacy requirements are yet to flow through fully to the banks' overall profitability and earnings growth.
Moreover, some in the market believe more capital requirement revisions are coming and the Australian banks will again be forced to raise capital from investors at a discount to exchange traded prices, or potentially cut dividends to preserve capital. The possibility of a coming dividend cut from the banks is likely to see more selling pressure on share prices.
Globally, the macro-economic picture for the banking industry and the interconnected wholesale funding markets is also darkening as central banks in major world economic centres such as Japan and Europe introduce negative interest rates. These kinds of shock monetary policies are a red flag for the outlook of a global banking industry many consider to be on the start of a deflation-driven downturn.
Finally, is the question of valuation. ANZ Bank trades on a high price-to-book ratio relative to its international peers and historical levels, while the earnings growth potential is limited for aforementioned reasons. Investors then may expect its shares to come under more selling pressure until many of the headwinds facing the banking industry in general start to relent.
