Big four banks crunched

Australia’s big four banks continue to get sold off, with all four banks among the biggest losers in the S&P/ASX 20 (Index: ^AXTL) (ASX: XTL) in early trading.

The index had dropped 1.8%, with Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) down 2.3%, 2.1%, 2.3% and 2.2% respectively.

In the past week or so, the banks have taken a hammering, after ANZ warned that its exposure to the resources sector would result in a $100 million increase in provisions for bad debts. ANZ’s share price has dropped almost 10% in the past week alone.

Clearly, investors are worried that there may be more skeletons in the closet, with the other three banks silent so far.

Concerns still remain over the banks being forced to raise more capital, with the Australian Financial Review AFR reporting today that the big four banks still remain heavily ‘over-leveraged’ – with assets exposures between 18.5 times and 20.4 times their Tier 1 capital. Macquarie Group Ltd (ASX: MQG) also appears to be highly leveraged at 19.2 times its Tier 1 Capital.

A 5% decline in the value of their assets would wipe out their equity, and likely force the Reserve Bank and taxpayers to come to their rescue.

That 5% decline could come from a number of different directions at the same time – like a perfect storm. Resource sector bad debts could soar from failing miners and energy producers, and their related industries, to which you could add falling property prices (whether its residential, commercial or other – and they don’t have to fall very far).

Foolish takeaway

So much for the banks’ shares never falling. Now investors might understand why we’ve been negative on the banks as their share prices soared to stratospheric levels. The good news is that at some stage, at least one or more of the big four banks will be a Buy and their share prices are heading in the right direction.

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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

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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