Banks stocks surrounded by storm clouds

Australia’s big four are taking a hit as capital raising prospects add to growing investor concerns.

Australia’s big banks have continued to slide on markets as analysts warn on shrinking margins and the likely need for billions of dollars in additional capital.

The pain has been hardest felt during today’s session on the back of weakness offshore, with European banks sold off with vigour as Bank of England Governor Mark Carney warned on financial stability risks post-Brexit and anxiety rose over the troubled Italian banking system.

ANZ tumbled the most among the local behemoths, sliding 1.9 per cent by the close of trade, while Westpac was next with a 1.2 per cent retreat.

CBA gave back 0.8 per cent, slightly worse than the broader market’s 0.6 per cent fall, while NAB closed in line with the benchmark.

Losses were pared in the afternoon, with ANZ earlier sliding more than 3 per cent, while the remainder of the major banks had been off at least 1.5 per cent around lunchtime.

The big four have slipped as much as 4.5 per cent this week alone, extending on a disappointing year that has been marred by concerns around low rates and rising bad debt charges.

The latest loss in momentum initially stemmed from the political uncertainty provided by last weekend’s uncertain Federal election result.

Investors panicked over a potential threat to the nation’s prized ‘AAA’ rated sovereign debt from the political paralysis, with any downgrade from the major ratings agencies tipped to raise funding costs and trim the margins of the big four, who rely heavily on offshore funding.

Traders have also had to chew over uncertainty around a further cut to the Reserve Bank’s cash rate and the potential sentiment hit from the cloud over the election result, as well as the prospect of a Royal Commission into banks should Labor manage to find a way to win power.

As falls accelerated today investors were eyeing a Morgan Stanley report that suggested the big four could be required to raise at least $17.5 billion to meet increasingly strict regulatory requirements on tier-one capital ratios.

The Morgan Stanley assertion followed a report from well-regarded UBS analyst Jonathon Mott on Tuesday that hinted at a similar capital raising number, although he stopped short of specifying a likely amount.

“Given we have yet to see the final Basel 4 rules, where the capital floor is set for IRB banks, or how APRA interprets ‘unquestionably strong’, we find it very difficult to estimate the quantum of capital the major banks may need to raise,” Mr Mott said.

“However, we believe it is likely to be substantial, potentially exceeding the capital raisings undertaken in 2015.”

The big four raised $17.3bn in 2015 through local equity placements.

Mr Mott added there was the potential the banks could act pre-emptively without knowing the exact requirements of policymakers.

“While regulators will give the banks a period of time to reach these new capital benchmarks, the market is unlikely to be as generous,” the UBS report read.

“As seen globally since the financial crisis the ‘prisoner’s dilemma’ could result in raisings occurring sooner rather than later.”

On the year to date ANZ is down 17.4 per cent, CBA is off 15.1 per cent, NAB is 15.3 per cent weaker and Westpac is down 15 per cent.