Why are the CBA and Westpac share prices sliding?
Shares of the major banks have tumbled 8-13% in the last month alone.
The Australian market has tumbled after the long weekend and financial stocks are underpinning that decline in what looks like an extended bad run.
Each of the Big Four banks, Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), National Australia Bank (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) were trading 5-6% lower at the time of writing.
Even shares in Macquarie Group (ASX: MQG) slid more than 7%.
Why are shares in the big banks under pressure?
Investor sentiment in the top banks was already bearish after the Reserve Bank of Australia last week stunned the market with a higher than expected 50 basis points lift in its benchmark rate, its biggest increase in 22 years, to 0.85%.
But the poor sentiment has continued into the new week, with the sub-index of ASX 200 financial stocks, AXFJ, tanking as much as 5.5% on Tuesday in its biggest intraday loss since May 2020.
Australian banks are tracking heavy falls on Wall Street on Friday and then again on Monday, as fears grow over aggressive interest rate hikes by the US Federal Reserve that would push the US economy into recession. The decision by the US central bank is expected on Wednesday (Thursday AEST).
It follows data on Friday showing US inflation hit a 40-year high of 8.6% in May, dashing policymakers' hopes that inflation had peaked. It prompted traders to price in a total of 175 basis points (bps) in interest rate hikes by September. US financial giant Goldman Sachs said it expects 75-basis-point increases in June and July.
It has also sparked fears of a recession for the world economy at a time when the Russia Ukraine conflict and global supply chain disruptions are resulting in surging inflation and weighing heavily on consumers and businesses across the world.
Dashed hopes
Aggressive rate hikes by the US Fed could force the hand of other major central banks, including in Australia, to similarly tighten monetary policy. Already, many economists are forecasting another 50 basis points by the RBA next month as it goes hard against inflation, with the cash rate expected to climb to around 2% by the end of the year.
That would dash hopes in the banking sector that gradually rising rates will be beneficial for them. Each of the Big Four banks last month outlined pressure on margins amid rising competition, rising costs in the form of higher wages, more staff to boost processing times and investment in technology.
Australian banks are also set to feel the biggest impact of higher rates on their key home loans business, which accounts for the biggest contribution to their earnings. Latest data already shows cooling demand in Australia's red-hot property market, with house prices falling by 0.1% nationwide but auction clearance rates are tumbling.
Concerns have also centred on the risk of rising defaults, as higher interest rates squeeze borrowers at the same time when inflation is surging because of higher food and petrol prices and households are set to face a bill shock due to a jump in power prices.
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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