Australia’s big four banks under more pressure

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) could see their share prices sink further this week, as fears over rising bad debts and higher capital requirements escalate.

According to the Australian Prudential and Regulation Authority’s (APRA) executive general manager of supervision and support, Charles Littrell, the big banks’ exposure to property, particularly residential property was a perpetual concern for the banking regulator.

“It is a significant issue of concern to us that close to two-thirds of balance sheets are exposed to property – mainly housing loans,” he said. The regulator also says it has become a bit more worried about it in the past year because of the point we are at in the cycle.

Bad debt provisions have dropped to multi-year lows but are starting to rise, evidenced by ANZ’s decision in late March to increase its bad debt charge by ‘at least’ $100 million to above $900 million, with the bank citing weakness in the resources sector and related industries.

And when it comes to the resources sector, the banks face two problems. The viability of companies such as steel producer and iron ore miner Arrium Ltd (ASX: ARI) and its net debt of over $2 billion, as well as other miners companies facing much lower commodity prices, could see bad debts soar if those companies fall over. The second issue, primarily in mining states Western Australia and Queensland, is the impact on workers either facing unemployment or the prospect of much lower wages, their ability to repay their housing loans, and the impact of falling house prices could have on the banks.

ANZ also faces the prospect of having to extricate itself from its so-called “super-regional” strategy, which former CEO Mike Smith championed, and was expected to deliver 20% of revenues from Asia-Pacific, Europe and America, and expanded in 2011 to deliver 25%-30% of revenue from those regions by 2017.

ANZ’s new chief Shane Elliot reportedly plans to shrink the bank’s Asian presence in Asia, sell its minority stakes in Asian banks and focus on key markets such as Australia. That likely means lower revenues, lower growth and likely a lower dividend.

APRA has also made it clear that the banks face higher capital requirements, but the regulator won’t announce its strategy until the end of this calendar year. However, APRA’s Littrell says, “It won’t be much higher that the banks couldn’t get there either by raising the money or accreting the capital over a few years from dividends.”

Yep, you read that right. The regulator wants the banks to either issue more shares, cut the dividends or both. A potential solution for the banks is the underwritten dividend reinvestment plan, which ensures they pay out zero capital when issuing dividends – but dilutes existing shareholders’ holdings.

Foolish takeaway

Banks’ share prices have already plunged, but there could be worse to come, despite the rise in bank’s share price in early trading on Monday.

Look out below.

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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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