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3 reasons why the banks’ share prices are being hammered

Source: Australian Broadcasting Corporation

In lunchtime trading, the share prices of the big four banks are dragging the market down. Even investment bank Macquarie Group Ltd (ASX: MQG) and diversified financial services provider AMP Limited (ASX: AMP) are being sold off.

As I write, Australia and New Zealand Banking Group (ASX: ANZ) is down 2.1% to $29.32, Commonwealth Bank of Australia (ASX: CBA) has seen its share price drop 2.8% to $82.92, National Australia Bank Ltd (ASX: NAB) is down 1.5% to $321.59 and the Westpac Banking Corp (ASX: WBC) share price has dropped 2.7% to $33.15.

There are three main reasons for that:

Performance not as good as the market was expecting

Commonwealth Bank’s trading update this morning wasn’t as good as the market was expecting. Cash earnings of $2.4 billion for the quarter were below the $2.45 billion the market was expecting, and underlying profits were around 6% below consensus estimates.

That comes after ANZ also released disappointing results last Tuesday.

Government legislation

The second factor is that media reports suggest the big four banks could be hit with a new levy as part of the Federal government’s budget this evening. The levy is expected to target the millions (or billions) in institutional loans the bank make to each other.

The Treasurer Scott Morrison has also announced that the budget would target the major banks on several measures, including an inquiry into competition in the sector, with the big four banks increasing their combined market share of the residential home loan market since the global financial crisis.

An extreme outcome could see the banks forced to separate their retail and wealth divisions, to try and avoid the types of conflict of interest issues where banks are selling their own products alongside competitors to retail clients.

Price

Investors have pushed up the share prices of the big four banks by more than 10% over the past six months, with ANZ hitting a 52-week high last month. That appears unwarranted given the weakening housing market, tougher competition and higher funding costs for the banks. On a relative valuation basis, the banks’ share prices appear expensive too.

Foolish takeaway

Investors often turn to the banks as reliable, stable dividend payers, but might want to look elsewhere now, particularly when there are better options out there.

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Based on the last 12-months of dividends, its shares are currently offering a fully-franked 4.8% yield, which grosses up to almost 7% when those franking credits are included. And in stark contrast to the likes of Commonwealth Bank and Telstra, this company just increased its dividend by over 13%, and guided for 2017 profits to grow by 20%!

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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