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Bank shares in the S & P / ASX 200 Index (ASX: XJO) are all in the red in the afternoon trading, following yesterday’s 0.50% increase in the cash rate. ‘RBA.
The higher-than-expected rise brings the official cash rate to 0.85%. And Gov. Philip Lowe has indicated that Australians should expect more increases from the central bank in the coming months.
While the ASX 200 is up 0.8% at the time of writing, the S & P / ASX 200 Financial Index (ASX: XFJ) is down 12%. And ASX 200 banks outperform the finance index.
At the time of writing, the share price of the Commonwealth Bank of Australia (ASX: CBA) was down 3.5%.
Shares of Australia and New Zealand Banking Group Ltd (ASX: ANZ) fell 2.4%.
Shares of Westpac Banking Corp (ASX: WBC) fell 5.3% after the bank became the first to pass on the total RBA rate hike to mortgage holders this morning.
And the share price of National Australia Bank Ltd. (ASX: NAB) is down 3.3%.
Financial stocks, as you’ve probably heard, can benefit from a higher rate environment.
So why are ASX 200 bank shares under pressure today?
Headwinds from rising interest rates
On the bright side of the central bank’s hardening cycle, ASX 200 bank shares have the potential to increase their profit margins amid higher interest rates.
CBA CEO Matt Comyn reported that each 0.25% increase in the cash reference rate increases the bank’s net interest margins by 0.04%. “This is only on the side of deposits and of course there are funding offset factors,” he said.
According to Credit Suisse bank analyst Jarrod Martin (quoted by The Australian):
Net interest margins will be close to 2% of their current level, below 1.9%. Therefore, the balance sheet currently favors the rise, but the last stages (of the cycle) are not so good for bank stock prices due to asset quality considerations, such as the impact on asset prices. housing.
Therefore, ASX 200 bank shares seek potentially significantly higher profit margins than the loans they make.
But both Comyn and Martin also alluded to some headwinds.
Headwinds for ASX 200 bank shares due to rapid rate hike
As Comyn noted, one of the factors that will drive the profitability of ASX 200 banking stocks as rates rise is that their own financing costs also increase.
And as Martin said, the impending impact on house prices is also something investors will be watching closely.
Morgan Stanley’s head of Australian research, Richard Wiles, said ASX 200 bank shares are likely to perform worse if the RBA moves to raise the cash rate quickly.
According to Wiles (quoted by The Australian Financial Review):
Much of the benefits of higher rates are taken into account in the outlook. Home loan growth is likely to slow, inflation is putting more pressure on costs and a rapid and aggressive tightening cycle is increasing risks.
We believe the short-term earnings outlook remains strong, but the risk of a multiple devaluation of trading has increased.
Andrew Triggs, CEO of JP Morgan also noted the mixed impacts of higher rates on ASX 200 bank shares (courtesy of The Australian).
“Rising cash rates from historic lows should lead to modest expansion of net interest margin, but faster rate hikes raise concerns about slowing credit growth and deteriorating asset quality.” , he said. “Banks report major home loan repayments, but there is a large cohort of borrowers who have never seen interest rate hikes before.”
ASX 200 bank shares tend to perform lower when house prices fall.