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Australian banks led a market rout that wiped more than $40 billion off the sharemarket amid fears about the financial strength of lenders around the world.
After savage falls in banks overseas, shares in the big four Australian lenders dropped 4 per cent or more on Tuesday, dragging the ASX 200 down 2.9 per cent to its lowest close in two-and-a-half years.
Shares in ANZ have tumbled to their lowest price since late 2012, while Westpac and National Australia Bank shares are also at their lowest levels in several years.
Commonwealth Bank, which will provide a guide on the sector's financial health when it reports its profits on Wednesday, has suffered, too, as its shares plunge 4.6 per cent.
Fund managers said the local banks were caught up in a global sell-off of financial stocks.
Germany's Deutsche Bank shares lost 10 per cent after the lending giant sought to reassure investors it could repay its debts.
Greek banks plummeted 27 per cent as investors ditched riskier assets, a trend that triggered a fresh bout of fears in credit markets used by banks to raise billions of dollars in funding.
The global rout comes as experts debate whether Australian banks may cut their highly prized dividends as returns are squeezed by narrower profit margins, tougher regulation and a likely rise in soured loans.
Investors Mutual investment director Anton Tagliaferro said there was a "question mark" over the big four banks' dividends, as shareholder returns were dampened by tougher capital rules and rising funding costs, which squeezed profit margins.
"I think dividends will most likely be flat, but there may be a surprise cut here because of the extra shares on issue and profits are not growing," Mr Tagliaferro said.
ANZ in focus
Mr Tagliaferro said the main fears driving the global plunge in bank shares were the exposure of lenders to lower commodity prices and emerging economies.
He said these presented bigger risks for ANZ – whose shares had fallen 38 per cent from their peak last year – than the other big banks.
The price of bank shares has been devalued worldwide. Australia cannot escape it.John Abernethy
"Clearly, ANZ for a while there was trumpeting how it was charging into Asia and how it was the number one resource lender in Australia. That's probably why ANZ has been the weakest of the banks."
Clime Asset Management chief investment officer John Abernethy said the slide in bank shares was a "global phenomenon" which was also affecting Australia's lenders.
Further to fall
While Australian banks were more profitable than most, he said their share prices had been whacked because they tended to trade at a premium to others, meaning there was further to fall.
"The price of bank shares has been devalued worldwide. Australia cannot escape it," he said.
"Because of our premium rating, we are reflecting the de-rating much more than other markets."
Mr Abernethy said when banks shares fell this sharply, it was sometimes a sign of broader risks in the economy, but it was not yet clear whether this was the case.
However, despite the concerns about global banks, others maintained the fears were overblown and the local big banks' dividends were relatively safe.
White Funds Management managing director Angus Gluskie said the outlook for the banks' earnings had not changed dramatically.
He did not think the big four banks' dividends were at risk.
"The underlying global concerns are about bad debts emerging in China, coupled with a move towards ultra-low and even negative interest rates," he said.
Dividends under threat
The rout in bank shares comes after some analysts have, in recent weeks, predicted National Australia Bank and ANZ Bank will cut their dividends this year in response to lower returns.
The market expects CBA to leave its dividend flat on Wednesday, while CLSA's Brian Johnson predicts a 10¢ cut to $1.88.
Alongside the sharp falls in share prices, the recent turbulence is spilling over into the wholesale funding markets used by banks to raise tens of billions of dollars a year.
The price of credit default swaps (CDS), which provide insurance against a bank default, have spiked to their highest levels since 2013, a sign that funding markets are increasingly jittery.
These credit spreads are a proxy for banks' wholesale funding costs, and analysts have warned that bank profit margins will be squeezed by the higher cost of funds unless the lenders pass it on to borrowers.
BOQ cuts staff
In a sign of this pressure, Bank of Queensland shares dropped 8 per cent on Tuesday after the regional lender told the stock exchange it would cut jobs to help offset a rise in funding costs.
BOQ chief executive Jon Sutton said in a statement there had been a "significant increase in volatility in funding markets" and this had created "headwinds" for the bank's profit margin outlook.
CBA chief credit strategist Scott Rundell said credit markets were "skittish," and the Australian lenders were getting caught up in the trend.
"We are getting caught up in this global uncertainty at the moment. The banks are the next perceived risk," he said.
"Fundamentally, there is no rhyme or reason why this should happen now. There are headwinds facing banks, but they are not as material as recent moves would suggest."