Why are the CBA and NAB share prices under pressure today?
The major banks have been mixed over the last 6 months, with their shares ranging from a gain of 15% to a loss of 10%.
Shares in major banks are normally an investor favourite but on Tuesday the sector is dragging down the overall market.
Shares in Commonwealth Bank (ASX: CBA) and National Australia Bank (ASX: NAB) have slid more than 1% in early trading while rivals Australia and New Zealand Banking Group (ASX: ANZ) and Westpac (ASX: WBC) were trading between 0.5% and 1% lower.
What is weighing on the banking stocks?
Investor sentiment in the major banks has turned jittery ahead of the monthly board meeting of the Reserve Bank of Australia later on Tuesday, where investors anticipate another rate hike.
Following rising inflation, the central bank is starting its cycle of lifting rates, with experts predicting this will continue for the rest of the year.
According to Bloomberg's latest survey, many economists are predicting another 25-basis-point increase on Tuesday, but unusually it found almost as many expect the RBA to lift the rate by at least 40 basis points, with some expecting a 50-basis-point move, given that it has been behind the curve in rate hikes compared to other major central banks in the US, UK and Europe.
A relatively larger rate increase at this early stage of the rate rise cycle may be more than what investors have been conditioned for and could spark a sell off as businesses and households are left to count the rapidly increasing cost of funds.
In that scenario, bank stocks could be the one to feel the short end of the stick in the immediate term, as investors reconsider future earnings potential and consequently valuation multiples.
From the major banks' point of view, the biggest impact of rising rates will be felt on their key home loans business which accounts for the biggest contribution to earnings.
Last month's rate hike, the first increase since 2010, has been matched by an almost immediate cooling in Australia's red-hot property market, with house prices falling by 0.1% nationwide.
With the cash rate likely to hit nearly 2% by the end of the year, Federal Treasurer Jim Chalmers also warned of significant financial stress on households ahead of RBA's anticipated rate hike this afternoon.
This comes at a bad time for the banking sector. Each of the Big Four banks last month outlined pressure on margins amid rising competition in the key home loan and business loans market.
The major banks are already grappling with higher costs in the form of higher wages, more staff to boost processing times and investment in technology. They will now also have to brace for rising loan impairments and arrears from customers at the same time they are forced to shell out higher rates on deposits for customers.
CBA last month said it was already adopting a cautious approach to potential risks because of higher interest rates, inflationary pressures and supply-chain disruptions by maintaining high credit provisions.
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