Here’s why your Big Bank shares are crashing

Interest rates will remain on hold for another month.

The Reserve Bank of Australia met for the first time in 2016 this week, deciding that a cash rate of 2% is suitable, for now…

Sure, it acknowledged the severe turbulence that has defined share markets around the world since the beginning of the year.

And it acknowledged the plunge in oil prices and slowing growth in China, as well as Australia’s low inflation rate.

Much to the disappointment of high-yield dividend investors however, it counteracted those factors with an improvement in the non-mining parts of the Australian economy.

It also highlighted a rise in the pace of business lending, and also the declining unemployment rate.

Most people would argue that those factors are great for the Australian economy!

But you wouldn’t know it from looking at the local share market.

The S&P/ASX 200 (ASX: XJO) closed 116 points, or 2.3% lower on Wednesday. It was the ASX’s biggest one-day fall so far this year, adding to the 1% loss suffered on Tuesday.

It seems the volatility isn’t over just yet, and the ASX could fall even lower if oil prices don’t find a balance soon…

A Slippery Slope

As you’d expect, the energy sector has been at the centre of the market’s most recent setback.

Shares of Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL) are causing plenty of damage, and have shed 12.3% and 8.2% this week alone.

BHP Billiton Limited (ASX: BHP) is in hot water again as well…

The Standard & Poor’s credit agency finally pulled the pin on the miner’s credit rating, downgrading it by one notch.

Surely that will mark the highly anticipated end of the miner’s so-called “progressive dividend” policy.

After all, the S&P has already cautioned further downgrades to BHP’s credit score unless the Global Australian slashes its shareholder distributions.

The Sydney Morning Herald even quoted the credit agency as saying:

“We could lower the rating by another notch if the company remains committed to its progressive dividend policy while its cash flows are pressured by lower commodity prices.”

That’s bad news for shareholders, many of whom look at the miner’s fat, fully franked dividend as a primary reason to own the stock.

The same goes for shareholders of Australia and New Zealand Banking Group (ASX: ANZ), which recently flagged a potential cut to its own fully franked dividend.

As quoted by The Australian, ANZ’s new chief, Shayne Elliott, said the dividend was just “one of the things that might give“.

Don’t Bank on it

Shareholders of Australia’s biggest banks have enjoyed some incredible returns in recent years, both in the form of capital gains and fully franked dividends.

Their performance has been particularly noteworthy over the last six years or so, ever since the depths of the Global Financial Crisis.

In that time, they’ve been spurred by falling interest rates. That has led to growth in loans, booming house prices and of course, low bad debt charges.

The result?

Record earnings figures across the board, as well as record share prices.

That was up until March 2015 at least…

Nearly 12 months later and all four banks are languishing in official bear market territory.

Commonwealth Bank of Australia (ASX: CBA) is faring the best of the bunch, down ‘just’ 21% from its peak.

ANZ has performed the worst, down 36%, but Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB) are also down nearly 26% and 33% from their respective highs.

The big banks all fell between 2.8% and 5.6% on Wednesday alone.

TS 4 Feb

Source: Google Finance

What’s gone wrong?

Of course, some of the reasons are specific to the individual banks themselves…

For instance, investors have become uncomfortable with ANZ’s “Super Regional” Asian growth strategy which appears to be becoming unstuck…

The group’s chief, Shayne Elliott, is in the process of assessing whether the strategy is worth pursuing any further, or if it should just pull the plug now.

Meanwhile, the National Australian Bank’s expansion into the United Kingdom has been nothing short of a disaster.

NAB finally announced the divestment of its UK-based Clydesdale and Yorkshire Banking Group (ASX: CYB) yesterday, although the shares still plunged 5.6% for the day.

Notably, its dividend yield has also come under the microscope following the demerger, with analysts from Deutsche Bank warning of cuts there as well, according to The SMH.

But in addition to those company-specific issues, all four banks have been plagued with various other headwinds.

For instance…

  • Earnings growth has slowed, and is expected to continue doing so
  • Bad debts are expected to rise in the very near future
  • The falling Australian dollar is prompting foreign investors to sell their positions
  • Competition is red-hot for new customers, compressing net interest margins
  • House prices have rocketed higher, but are now slowing

To top it off, residential lending has ballooned out to record proportions and APRA, or the Australian Prudential Regulation Authority, has taken notice.

As a result of their “Too big to fail” status, the regulatory body asked all four banks, as well as Macquarie Group Ltd (ASX: MQG), to shore up their balance sheets.

Billions of dollars in capital have already been raised, diluting shareholder ownership considerably, and tens of billions more will likely need to be raised again this year.

That’s one of the reasons why the ANZ may be forced to cut its dividend, while the decision will no doubt affect the other banks’ shareholder returns as well…

Is this an opportunity?

Of course, Australian investors’ love for the Big Bank shares is no secret…

The love affair has been splashed all around the media for years, largely due to their fat, fully franked dividend yields and perceived levels of safety.

Sure, their yields have improved as the shares have fallen, but the banks themselves aren’t as safe as you might think…

Although they’ve all fallen sharply from their peaks, they each remain vulnerable to the headwinds facing the economy.

Maybe that means further declines in their share prices, or perhaps cuts to their dividends

The point is, there will likely come a point in time where the banks represent good value again.

After all, they’re the centrepiece of the entire Australian economy, and if offered at the right price could make for exceptional additions to any portfolio.

But right now, it seems there are far better opportunities investors should be focused on exploiting instead.

Where should you look?

While the banks have all fallen sharply, the broader ASX 200 has taken a beating of its own.

Down almost 19% from last year’s high, it too is approaching bear market territory, although much of the damage has been inflicted on the blue chips themselves.

Personally, I don’t think there are many opportunities at the big end of town right now…

Wesfarmers Ltd (ASX: WES) still represents good value, while Telstra Corporation Ltd’s (ASX: TLS) 5.6% fully franked dividend yield is looking increasingly compelling as well, in my opinion.

But otherwise, I think the better opportunities lie outside of the ASX 20.

Sure, they can be more difficult to find, but the potential rewards can be considerably greater than those offered by the growth stocks of yesterday, making it worth the time and effort.

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