Australian shares suffered their biggest fall of the year on Tuesday, losing more than $40 billion in value as investors dumped banking stocks amid growing global concerns about the health of the financial sector.
The S&P/ASX 200 index closed at a two-and-half year low, dropping 2.9 per cent to 4832.1, its largest one-day slump since late September. The benchmark index has lost more than 8 per cent since the start of the year. The broader All Ordinaries fell 2.8 per cent to 4882.6.
All the major banks finished heavily in the red: ANZ 4 per cent to $22.79, Commonwealth Bank 4.6 per cent to $72.87, National Australia Bank 4.8 per cent to $24.90, and Westpac 5.1 per cent to $28.70.
Among other blue-chips, BHP fell 1.9 per cent to $16.05 and Rio Tinto dipped 1.2 per cent to $42.00. Telstra dropped 1 per cent to $5.61.
Among energy stocks, Santos was down 5 per cent to $3.06 while Woodside was down 2.5 per cent to $26.73.
The local losses followed severe falls in overseas markets overnight, with the Standard and Poor's 500 on Wall Street losing 2.5 per cent while in Europe the Stoxx50 fell 3.3 per cent, with Deutsche Bank tumbling 9.5 per cent as credit-default swaps on the bank's debt soared.
Analysts at CreditSights said Deutsche may struggle to pay coupons on its riskiest bonds next year should operating results disappoint or the cost of litigation be higher than expected. The lender said it has sufficient capacity this year and next year.
A 2.7 per cent drop in Brent crude oil to $US33.15 per barrel overnight also damaged sentiment among energy stocks. Brent fell further on Tuesday to under $US33 although it recovered in afternoon trade.
"We haven't seen such a savage sell-off for quite some time," said Ord Minnett senior private client advisor Tony Paterno. "Banks are taking the major percentage of the sell-off - I would say about half."
Mr Paterno said local concerns were a big impact on the banking sector, with the Big Four kicking off their reporting season this week.
"There's ongoing concern about how much capital they're going to need to raise and the other thing people are worried about is a prospect of a cut in dividends," he said.
While falls in overseas banks was a factor in the local sell-off, "their sector is very different to ours," said Mr Paterno. With the closure of many Asian markets due to the Chinese New Year holiday, Australia and Japan - down over 5 per cent in afternoon trade - were taking the brunt of the sell-off, he said.
Analysts said that as a result of tougher capital requirements, banks were enduring further pressure on margins which are already at record lows. The "Big Four" banks in Australia have together raised over $20 billion since May 2015 as regulators try to make them among the safest in the world.
"There is still uncertainty this year on how much more capital they need, that's an overhang," said Omkar Joshi, investment analyst at Watermark Funds.
"There is no real credit growth and that's part of the reason why margins are under pressure. That's why there is so much competition for lending," Mr Joshi added.
The banks are continuing to be the hardest hit - and the banks are one of the worst-performing parts of the market so far this year, Commsec market analyst Steven Daghlian said.
"European shares fell to their lowest in a couple of years. The health of the banking sector was one of the concerns and the losses have continued on to our market. The major banks are down very heavily and they're the biggest part of the Australian market."
On the Australian markets on Tuesday the big winners were gold miners, with the turmoil prompting investors to seek safety. The precious metal's price jumped 2 per cent to a 7-1/2-month high, briefly nudging above the psychological level of $US1200 an ounce.
Newcrest rocketed 8.2 per cent to $16.80 and Evolution Mining shot up 6.4 per cent to $1.82.