Shares of Australia's second largest bank by market capitalisation, Westpac Banking Corp (ASX: WBC), fell 1.9% today – taking it down a total of 16% in just one month.
Whilst today's share price falls can be credited to the bank going ex-dividend overnight, something else is behind the latest sell-off of its shares…
Indeed, the rapid rise in price of Australia's biggest banks has been well-documented by the financial media.
We here at The Motley Fool Australia opined on a number of occasions that each of them were overvalued. And – although sooner than expected – it seems as though our prognostications are coming to fruition.
However if the big banks really are expected to enter a period of subdued credit growth, it'd be naïve to think the worst of the share price falls has been endued. Both retail (e.g. Westpac) and investment banks – such as Macquarie Group Ltd (ASX: MQG) – are heavily leveraged to the market cycle.
In recent times we've seen profits from each of the big banks benefit profoundly from falling bad debt charges, cheap wholesale debt and robust property prices. However, these forces work both ways.
Should you sell your Westpac Banking Corp shares?
Personally, I doubt the big banks are going to crash anytime soon (even though they've each fallen over 10% in the past month).
However, sooner or later, the egregious leverage and tax incentives which have been used to fuel Australia's property market over two decades – coupled with all the usual risks involved in the market cycle – will come home to roost on Australia's big bank stocks.
Moreover bank shares should be cheap to reflect a slowing economy; yet they're currently changing hands at very expensive levels. Therefore, I'd at least take some of my profits (or losses!) in Westpac shares off the table and look for other, more compelling, investment ideas…
