Following the release of its half-year results this morning, shares of Westpac Banking Corp (ASX: WBC) plunged as much as 4.6% before recovering to trade 3.3% lower at the market's close this afternoon.
However Westpac's disappointing cash profit result, which was flat year-over-year, wasn't the only figure to disappoint shareholders and doesn't explain the significant weakness seen today right across the banking sector.
Indeed each of Westpac's key rivals also fell hard throughout the day…
- National Australia Bank Ltd (ASX: NAB) down 1.44%
- Australia and New Zealand Banking Group (ASX: ANZ) down 2.52%
- Commonwealth Bank of Australia (ASX: CBA) down 1.07%
Could it be that investors are beginning to think the tide has turned on our big banks?
Whilst still in positive territory for the year, the past five trading days on the ASX has seen each of the banks share prices sold off heavily…
- National Australia Bank Ltd down 5.7%
- Australia and New Zealand Banking Group down 6.5%
- Commonwealth Bank of Australia down 5.2%
- Westpac Banking Corp down 8.7%
This compares to just a 2.6% fall from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
Clearly, investors are being spooked by something.
Perhaps it was Westpac's outlook which has everyone worried. CEO Brian Hartzer said, "While I'm positive about the outlook, the economy is currently in transition and this means that we expect growth to be uneven across different industry sectors and geographies."
He added: "Banking competition will remain intense, including from new entrants."
Profit margin erosion is one of the first signs of an industry succumbing to intense competition and becoming commoditised. As we showed in this article, Westpac's margins have trended downwards for the past 10 years.
Whilst its push into superannuation and broader wealth management has played a part in driving earnings higher in recent years, Westpac's non-interest income failed to come to the rescue today as growth in mortgages was below system.
Are the big banks a bargain?
The big banks are fantastic businesses which have produced excellent shareholder returns on the back of 24 years of non-stop economic growth fuelled by both a mining and housing boom. Whilst we can only deduce so much about a company from just one half-year result, today's report could be the start of slower growth in bank profits.
Indeed it should be an opportunity for all big bank shareholders to reassess their exposure to the sector. This is especially important now, with shares in each of the big banks currently trading at high earnings multiples and very high book ratios – which could hint we're at, or near, a peak in the business cycle.
