In what has been an agonising week for most investors, each of Australia's Big Four banks have officially fallen into a 'technical correction' and there are reasons to suggest their dream run has come to an end.
All of the major banks have experienced a remarkable run since the lows of the Global Financial Crisis, and have enjoyed a particularly strong four-year stretch. All four have generated superior returns to the benchmark S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) in that time, in the form of both capital gains and fully franked dividends.
But since their recent peaks, all of the banks have retreated by more than 10% – which is defined as a 'technical correction' – and there are fears there could be even more pain to come.
Here are seven strong signs that their dream run could finally be over.
- Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA) have both produced disappointing earnings reports this week, and Australia and New Zealand Banking Group (ASX: ANZ) also referred to tougher times that lay ahead. Westpac's profit was flat on last year's result, while Commonwealth Bank's profit actually fell from $2.3 billion to $2.2 billion.
- Commonwealth Bank spared few details in its quarterly report – a sign that things aren't as rosy as they once were.
- Westpac is issuing new shares under its Dividend Reinvestment Plan to increase its common equity Tier 1 (CET1) capital position as a safeguard against any economic downturn. National Australia Bank Ltd. (ASX: NAB) has also gone into a trading halt this morning pending the announcement of a capital raising. According to the Fairfax press, it could be raising up to $3 billion.
- Net interest margins, which are a key measure of bank profitability, are sliding as a result of the intense competition between rivals to gain new customers. This does not bode well for the banks' future profit growth.
- Bad debt charges have been hovering around record lows thanks to the low interest rate environment and have acted as a primary driving force behind the banks' record-breaking profit results. But the rate at which these impairment charges are diminishing has slowed considerably, indicating the steady decline could be approaching a turning point.
- The Reserve Bank of Australia cut interest rates to 2 per cent on Tuesday but indicated that the rate cutting cycle may be over. Investors sold bank stocks en masse, recognising that the stocks are overpriced and the dividend yields not as appealing as they would be if interest rates were to be cut further.
- Bond yields have risen strongly with investors also under the impression the Reserve Bank's cutting cycle has come to an end.
The banks have rallied to unprecedented highs and greatly improved the wealth of many investors as a result. But here at The Motley Fool, we've been saying for a long-time that the banks have become overpriced and could well be a ticking time bomb. Despite the recent falls, there is a very real chance each of the Big Four could have plenty of room to fall even further — a scenario that every investor needs to be prepared for.
