Big four banks face 5 key risks which could see share prices plunge

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) face a growing number of headwinds, according to ratings firm Moody’s.

The problem for the banks is that those headwinds are likely to place pressure on the banks’ credit profiles, “particularly in the context of their very high ratings“, according to Moody’s vice president and senior analyst Frank Mirenzi.

Whilst solvency and liquidity buffers have improved in recent years, the path of future balance sheet strengthening is likely to be slower than in previous years – at a time when risks continue to rise,” he says.

Here are the five risks identified by Moody’s…

  1. A prolonged period of low interest rates will negatively impact the banks’ net interest margins (NIM). So far Australia’s banks have managed to pass on most of their rising costs to customers thanks to their strong pricing power. But they may face stronger challenges to maintain existing margins if interest rates fall.
  2. Rising competition for retail deposits could squeeze bank margins. According to Moody’s, the banks need to meet the requirements of the Net Stable Funding Ratio will see the banks try and raise more funding from deposits. Moody’s also says the banks could become increasingly sensitive to volatility in wholesale market funding costs.
  3. At the same time, risks in the housing market are rising. A high exposure to residential mortgages by the banks is well known. The problem is that household debt is rising, but income growth is low, increasing risks for mortgage lenders.
  4. There’s also the prospect of rising unemployment. In the latest data out today, Australian unemployment ticked up to 5.8%, but could surge higher. An additional factor is the rise of part-time employment at the expense of full-time employment.
  5. Moody’s also says that the banks’ asset quality is coming off a cyclical high, as the global commodities cycle unwinds. More than a few Australian property investors are sitting on huge negative equity balances after investing heavily in property in mining towns. Property prices have crashed in some mining regions by 40% or more. That could see the bank’s bad debts rise. There’s also the banks’ exposure to the miners themselves and mining services companies – like Arrium Ltd (ASX: ARI) – which recently filed for voluntary administration.

Additionally, the banks could be forced to raise more capital to maintain their top quartile ranking for Tier 1 capital ratios. That will dampen growth and earnings as we discussed last week.

Foolish takeaway

Think bank share prices are cheap? They could get a whole lot cheaper if the risks identified by Moody’s come to pass. Investors might want to hold off buying more bank shares just yet.

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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

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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