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Citigroup has advised clients to sell shares in ANZ and National Australia Bank - which hold about 50 per cent of the New Zealand market - as it predicts tougher times for Australia's big banks.
The brokerage this week published a research note raising concerns about the impact of the credit crisis on the Australian banking sector, warning of a "vicious cycle".
Citigroup analysts said the global liquidity squeeze had constrained the banks' access to capital.
Their response was to tighten lending criteria, making it more difficult for customers to borrow. At the same time lending was being reduced, high inflation was stopping central banks from cutting interest rates.
These factors were contributing to an economic slowdown which in turn fuelled unemployment and eroded consumer spending, leading to rising loan defaults. Those defaults then weighed on banks' capital reserves, starting the whole cycle again.
Shares in Australia's banking stocks have been sold heavily in the last year on the flow of bad news out of the US and European banking sectors.
Those of ANZ (which also owns National Bank) and National Australia Bank (which owns BNZ) have plunged by 38 per cent and 29 per cent respectively.
Citigroup's outlook for these two was particularly gloomy, with ANZ's earnings per share expected to fall by 7 per cent in the current year, and it has cut its recommendation on both to "sell". Citigroup said that while Australian banks had performed better than most overseas peers, the market was "clearly anticipating earnings downgrades" for the banks for the next two years.
The brokerage has reduced its earnings forecasts for the banks for the second time in four months and said: "It seems clear the downgrades are really only just beginning for the domestic banks."
Worst hit would likely be ANZ and National Australia Bank.
Citigroup was particularly concerned about ANZ's exposure to New Zealand where it is the market leader.
"An economic downturn and further irrational pricing in the New Zealand market remains a risk for ANZ given their overweight position."
Across Australia's big banks Citigroup has cut its 2009 earnings per share estimates by 6 to 10 per cent. For 2010 it has cut estimates by 7 to 10 per cent.
The changes to its estimates would see "flat to slightly negative earnings growth" next year for ANZ, Commonwealth Bank of Australia (which owns ASB Bank) and National Australia Bank.
Citigroup rates Westpac and Commonwealth Bank as "hold".
Massey University head of banking studies David Tripe said it was "reasonable to assume bank earnings will fall" given what was taking place in the global and local economies, however, "indicators available to us suggest the situation is less than disastrous".
ANZ shares closed 73c lower at A$18.07 on the ASX yesterday, while National Australia fell 67c to A$27.65.
