Why are the CBA and NAB share prices rebounding?
Shares of the major banks have tumbled 11-18% in the past month alone but are rebounding today.
A lift in the heavyweight financial stocks is buoying the Australian market on Thursday after an extended bad run that has seen the sector give up significant value in the last month.
At the time of writing, 3 of the Big Four banks, Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) were trading more than 1% higher, while Westpac (ASX: WBC) was up 0.2%.
What is pushing up the big bank shares today?
Much of the gains in the major banks is flowing from a rebound in sector stocks on Wall Street overnight after the US Federal Reserve raised rates by a mammoth 75 basis points, the most in nearly 3 decades.
But to the market's relief, Fed chair Jerome Powell explicitly said he doesn't expect the 75-bps rate increase to become a common occurrence and also affirmed that he didn't see signs of a broader slowdown in the US economy.
Typically, rising interest rates are seen as beneficial for lenders because they help revenue and margins grow, but the threat of a recession amid faster than expected rate increases has weighed heavily this year and peaked when data last week showed US inflation hit a 40-year high in May.
A more aggressive rate hike outlook by the US Fed would also have forced other major central banks, including Australia's RBA, to lift rates faster, sparking fears of a global recession at a time when the Russia Ukraine conflict and global supply chain disruptions are already weighing heavily on consumers and businesses.
But those fears have been put to rest, at least for another few weeks.
Investor sentiment in the top local banks has already taken a beating after the RBA stunned the market last week with a higher than expected 50 basis points lift in its benchmark rate, its biggest increase in 22 years, to 0.85%.
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 above 2% by the end of the year.
Banks generally prefer gradually rising rates because it allows customers to adjust to the higher payments. However, the current aggressive outlook makes things difficult for them because it raises the risk of defaults, as higher interest rates squeeze borrowers at the same time that food and petrol prices spike, and households also face a jump in power prices.
Australian banks are 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 and auction clearance rates tumbling.
Still, some in the market believe bank shares have been beaten down too much in recent weeks. Analysts at Citi believe some of the concerns are unjustified and the banks have already built a significant level of financial buffer against rising rates.
The broker, in fact, this week said it is time to snap up beaten-down bank shares.
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