Why are the CBA and NAB share prices stumbling today?

Posted: 2 May 2022 1:20 pm

Shares in the major banks have stayed nearly flat over the last 6 months, so why are they stumbling today?

The heavyweight banking sector has been a major drag on the overall ASX indices on Monday.

Each of the Big Four banks – Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), National Australia Bank (ASX: NAB) and ANZ (ASX: ANZ) are down between 0.5% and 1.8% at the time of writing.

What is weighing down on bank stocks?

Sentiment in the ASX bank stocks has no doubt been affected by a steep decline in financial stocks on the US market on Friday. But investors are also worried about prospects for the sector ahead of the major banks outlining their operational performance over the next 2 weeks.

This week, ANZ and NAB will outline their first half performance, with Westpac's half yearly results along with CBA's quarterly update to come next week.

Analysts largely expect the lenders to report a further squeeze on interest margins because of growing competition. The banks have seen a ramp up in competition in the key home loan market amid record low rates and borrowers switching to fixed-rate loans.

At the same time, their costs have jumped due to growing investment in digital capabilities, processing bottlenecks and broader inflationary pressures, although most lenders say they are on track with longer term cost cutting plans.

Still, investors seem to be betting on a repeat of lower margins, flat mortgage books, weak trading income and higher expenses at a time when local home prices data indicates the coming end of the bull run in the housing market.

That prospect was underlined by results from mid-sized Bank of Queensland last month, which reported a hit to margins from stiff housing loan competition.

Better outlook?

Still, there is scope for optimism with a looming lift in interest rates by the central bank expected to bolster the outlook for banks.

Economists widely expect the Reserve Bank of Australia to lift its benchmark cash rate from a record low or 0.1% on Tuesday to counter super-charged inflation, starting a series of rate hikes that could see the cash rate hit as much as 2% by the end of this year.

That will provide the major lenders with some support because rising rates typically allow banks to expand their net interest margin.

This would also come at an opportune time for banks given that the Australian property market is showing signs of cooling after a bumper 22% surge in prices in 2021.

Meanwhile, earnings at some of the top banks are likely to benefit from new business that was flagged in their earnings reports in February. Several of the banks are also likely to have progressed with their cost cutting plans.

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