Investors are finally falling out of love with Australian bank stocks.
After a six-year, 300 percent rally that turned Commonwealth Bank of Australia into a A$156 billion ($125 billion) company, the lender on Wednesday slumped the most since 2009. Westpac Banking Corp. also entered a correction this week, falling more than 10 percent from a recent high, amid concern about the outlook for earnings and dividend growth.
A combination of record profits and large dividends, made more attractive as the central bank cut interest rates, has underpinned the investment rationale for Australian bank stocks for more than five years. Now, while earnings continue to grow, the lenders face shrinking interest margins and the prospect of more onerous capital requirements. Commonwealth Bank and its competitors make up almost a third of the country’s benchmark equities gauge, which fell 2.3 percent Wednesday, its steepest slide in two years.
“Banks have been enjoying a great multi-year run due to the hunger for yield and now all the factors that drove them forward are going into reverse,” said Nader Naeimi, who helps manage about $118 billion as Sydney-based head of dynamic asset allocation at AMP Capital Investors Ltd. “Bond yields are picking up and that’s putting a lot of pressure. On top of all that, you have potential regulatory capital charges on the Aussie lenders. So you’ve had a bit of a perfect storm.”
The four banks were the biggest drags on the S&P/ASX 200 Index on Wednesday, followed by Woolworths Ltd., which tumbled 5 percent after the supermarket operator said its core sales growth measure increased at the slowest pace in three years.
Commonwealth Bank lost 5.9 percent to A$82.98, wiping out this year’s advance, while Westpac slid 3.7 percent to A$33.99. Australia & New Zealand Banking Group Ltd. fell 2.7 percent, as did National Australia Bank Ltd., which reports earnings Thursday. Yields on 10-year Australian sovereign bonds surged 13 basis points to 2.92 percent, the biggest one-day jump since February.
The nation’s largest lenders may be required by regulators to hold more capital against potential mortgage losses. Westpac this week said it would raise A$2 billion in view of regulatory changes, while ANZ said it may add as much as A$480 million. Commonwealth Bank reported a third-quarter cash profit of A$2.2 billion, unchanged from a year earlier on higher expenses and bad-debt charges.
“More than five years of record profit run for the Australian banks are coming to an end,” said Simon Burge, who oversees A$450 million including Commonwealth Bank shares as chief investment officer of Above the Index Asset Management Pty. “It is getting harder for the banks to generate profit growth with margins continuing to fall, competition and increasing bad-debt expenses.”