Why are the CBA and Westpac share prices on a high?
Shares in the major banks are down 2-11% over the last 6 months so why are they growing today?
The heavyweight banking sector is leading the ASX indices higher on Monday.
Shares in each of the Big Four banks, Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), ANZ (ASX: ANZ) and National Australia Bank (ASX: NAB) were trading around 2% higher at the time of writing.
What is boosting bank stocks?
Investor sentiment in bank stocks is picking up ahead of the impending 25 basis points increase in interest rates by the US Federal Reserve on Wednesday. This would be the start of an upward rate cycle and analysts expect the Fed to hike rates 6-7 times this year alone, setting off rate increases by central banks globally.
Typically, rising interest rates are beneficial to banks as they provide a bigger margin buffer to lenders, while the reverse is true in a lower interest environment.
Each of the Big Four Australian banks, for example, have reported pressure on net interest margins in their recent results, blaming it on intense competition amid the low rate environment.
That has been instrumental in souring sentiment in bank stocks in recent months, resulting in the market favourites losing 2-11% of their value over the last 6 months.
But things are expected to change as interest rates rise and lending activity increases, helping banks improve margins.
Economy/costs
With the economy on an upswing as it reopens from the pandemic restrictions of the last 2 years, analysts expect the Reserve Bank of Australia to also start increasing rates from the middle of this year.
Top lender CBA expects the economy to grow 4% over the next 12 months, with unemployment to fall to 50-year lows, its chief executive Matt Comyn recently told the Australian Financial Review.
Despite slowing house prices the key housing loan market, which contributes the bulk of the profits for the major banks, has continued to perform strongly.
Meanwhile, the big banks have used the pandemic to restructure operations.
Each of the major lenders is on track for significant cost cuts that will leave their financials in robust shape for coming years. They have also speeded up divestments of non core activities, including wealth management divisions, insurance services and international subsidiaries.
That has left the major banks currently trading at attractive price to earnings multiples in the mid-to-late teens. Combined with solid dividend yields ranging from 4-6%, investors could be lining up for bank stocks again.
Considering buying CBA or WBC shares?
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