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Bad news for bank shareholders

Australia’s unemployment rate has risen to 5.8% in November, from 5.7% in October, according to the Australian Bureau of Statistics (ABS).

That’s potentially bad news for the major banks, ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) and their shareholders. As unemployment rises, bad debts tend to rise, loan defaults rise, and the number of borrowers falling behind in their repayments on loans tends to rise.

Australia’s participation rate remained at 64.8%, while 21,000 jobs were added in November over October. Economists had been predicting a rise of 10,000 jobs. Tasmania still has the highest unemployment rate of 7.8%, while, perhaps surprisingly, Western Australia has the lowest of all the states at 4.3%. New South Wales and Victoria’s unemployment rates were 5.9% and 6.2% respectively.

As a result of the unemployment data the banks have been sold off in today’s trading, with CBA losing 1.9% to $73.11 the worst and NAB down 0.6% to $32.67, the best.

Yesterday’s consumer confidence data showed that confidence was falling, with major concerns being the labour market and rising unemployment. The news that Holden would cease its local manufacturing operations in 2017 will likely be another blow to consumer confidence, and could see a further blowout in the unemployment figures. Add that to falling levels of credit growth, which are vital for banks to grow their earnings, and bank shareholders expecting double digit growth in their share prices are likely to be very disappointed.

What’s more, rising bad debt could see earnings actually fall and banks forced to cut their dividends. For bank shareholders that is likely to result in a double whammy hit – lower dividends and a lower share price.

Foolish takeaway

Rising unemployment could also mean the Reserve Bank is more likely to cut interest rates further in 2014, and potentially driving a rise in credit growth. Bank shareholders will likely be hoping for more rate cuts.

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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

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