Okay, bank shareholders, have your rotten tomatoes ready…
The Australia and New Zealand Banking Group (ASX: ANZ) share price fell as much as 4.5% today – and is down 15% this year!
It gets worse.
Indeed, if I really wanted to cherry pick, ANZ's share price is 36% lower than its March 2015 52-week high of $37.25. Ouch!
Now, I can't confirm that today's share price fall has something to do with the recent ANZ trading scandal that has overwhelmed news mastheads, or if it's concerns over Australia's debt bubble, a result of China's slowdown, the possibility of a dividend cut, or all of the above.
Are you worrying, yet?
Australia and New Zealand Banking Group's 36% share price fall compares to those of its peers:
- National Australia Bank Ltd.'s (ASX: NAB) share price is down 32%
- The Commonwealth Bank of Australia (ASX: CBA) share price is 19% lower; and
- Westpac Banking Corp's (ASX: WBC) share price is down 24%
So perhaps it's a banking sector thing.
Time to cycle out?
For the record, I don't have share market exposure to the major banks, and I certainly don't blame investors for pulling their money out. As has become well known to regular readers, I'm bearish on the whole sector.
You see, banking is intensely cyclical – just like mining.
Indeed, we use debt to buy fancy cars and nice houses during the boom times. These times are usually characterised by low-interest rates and good employment levels.
But when the jobs dry up and there's talk of a recession (we haven't had one in 24 years), no rational person wants to take on 95% leverage to buy an asset (a house) which yields less than 3%, or gear ourselves up with 100% leverage to buy to an 'asset' (a car) that yields negative returns.
Therefore, if banks truly are cyclical – which they are – you can bet that they'll fall hard when the cycle isn't in their favour. Hence, it'd be best to avoid them.
To make things easy, let's use a simple checklist to weigh-up some recent economic trends to gauge what stage of the banking cycle we may currently be enjoying:
- Is the economy slowing? Check.
- Have hundreds of billions of investment dollars been pulled from Australia? Check.
- Are higher regulations and capital raisings going to hurt returns? Check.
- Are bad debts at record lows? Check.
- Could Australia's per person debt level be at a record high? Check.
- Are profit margins the worst they've ever been? Check.
- And are Australia's bank shares among the most expensive in the world? Check.
…so why have bank shares fallen?
