Bank shares tipped to fall further

Credit: Canadian Pacific

The heavy selloff of Australia’s big four bank shares during recent sessions is not a buying opportunity, but rather a signal that investors are finally understanding some of the risks facing the sector.

Shares across the sector are trading mostly flat today, allowing investors to catch their breaths following two of the most nerve-racking sessions for bank investors in recent months.

Australia and New Zealand Banking Group (ASX: ANZ) was the hardest hit losing 8.4%, with Westpac Banking Corp (ASX: WBC) following closely behind with a 7.4% decline. Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB) also dropped 4.3% and 5.9%, respectively.

By my calculations, it was enough to wipe roughly $24 billion from the market values of the big four banks in just two days, with $6.2 billion of that coming from ANZ.

The selloff was sparked by an announcement made by ANZ on Thursday morning before trading began. The announcement revealed that the bank was expecting to add “at least” $100 million in bad debt charges for the half, on top of the $800 million it said it was expecting in February.

Notably, Westpac also flagged $25 million in charges relating to consumer loans – particularly in mining-heavy regions – although the bank said this was not reflective of broader problems. Other analysts have also described these as modest and manageable, according to The Sydney Morning Herald.

In regards to ANZ’s announcement, $100 million isn’t a huge deal for a bank the size of ANZ. What the market is likely more concerned about, however, is that the increase came as a result of the bank’s exposure to companies in the resources sector where corporate earnings are suffering due to plunging commodity prices.

While some of the issues are likely to be company-specific, the other major banks are exposed to resources as well, leading to speculation that ANZ’s experience could be the beginning of an industry-wide trend. Low bad debt charges have supported strong earnings growth in recent years, but a reversal of that trend would instead hinder future earnings growth.

Given the banks’ obligations to raise extra capital as a safeguard against a potential economic downturn, a fall in earnings could also lead to cuts in dividend payments. It’s not worth getting too ahead of ourselves (that hasn’t happened yet!), but it is worth acknowledging as a risk.

Why I’m not Buying

The banks may have fallen significantly in share price over the last 12 months or so, but they were arguably overpriced at that time anyway so it doesn’t seem appropriate to say they’re currently trading at such a heavy discount.

The fact is, the banks are facing a number of headwinds - some of which may not be fully priced into the shares just yet. While I would happily add the banks to my own portfolio for the right price, I don't think the opportunity is compelling enough just yet, and think there are other blue chip shares currently offering far greater value for money.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

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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