Why are the CBA and ANZ share prices rebounding?
Shares of the major banks, on average, have lost 16% of their market value in the past month alone, so why are they growing today?
The Australian market looks like it could finally end a stretch of bad sessions on Tuesday and it would have the heavyweight financial stocks to thank for much of the gains.
At the time of writing, Commonwealth Bank (ASX: CBA) was up 1.6%, while National Australia Bank (ASX: NAB), Westpac (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) were trading more than 2% higher.
Why are the big bank shares bouncing back?
Investors in Australian banks have endured a horror last few weeks as fears of faster-than-expected interest rate increases by central banks have spooked the markets, with traders firm in the belief that this will drag the global economy into recession.
Indeed, much of that threat remains, as was reiterated by RBA Governor Philip Lowe at an event on Tuesday.
He warned that Australians should be prepared for more interest rate increases as the central bank looks to quash runaway inflation and bring it down to more manageable 2-3% levels.
Markets are braced for similar hawkish policy statements from US Federal Reserve Chairman Jerome Powell when he delivers testimony to the US House later this week.
But most investors believe the pendulum has swung too much the wrong way when it comes to the big banks.
This is attested by the heavy falls in the bank shares in recent weeks. In the last month alone, shares in CBA, NAB, Westpac and ANZ have tumbled between 15% and 19%.
However, canny investors are seeing value in these beaten down prices, which accounts for the strong gains in banking shares over the last 2 sessions.
Is it a good time to invest?
The outlook for the big banks remains mixed.
Morgan Stanley analysts have slashed price targets on the major banks by an average of 15% and cut earnings estimates to reflect changes to the outlook for rates and the economy. ANZ price target is now $24.30, CBA at $79, NAB to $26.60 and Westpac at $22.30.
The lenders generally prefer gradually rising rates because it allows customers to adjust to the higher payments, but the current aggressive outlook makes things difficult for them because it raises the risk of defaults, with higher rates squeezing borrowers at the same time when food, petrol and electricity prices spike.
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 and auction clearance rates tumbling.
But even the Morgan Stanley analysts believe margins will improve this financial year, before slipping in FY24 due to weaker loan growth and larger loan losses.
On the other hand, Citi analysts have argued that households in New Zealand are proving more resilient than expected to rising interest rates, even though the RBNZ was well ahead of its Australian counterpart in normalising its policy rate. This bodes well for Australian banks.
Citi believes some of the concerns over earnings are unjustified and the banks have already built a significant level of financial buffer against rising rates. The broker, in fact, last week said it is time to snap up beaten-down bank shares.
That is exactly the advice some investors seem to have followed.
Considering buying CBA or ANZ shares?
If you are keen to buy shares in CBA, NAB, WBC or ANZ you should consider investing through an online share trading platform.
Not all platforms offer the same list of stocks. Some trading platforms offer US stocks only, so make sure to select a platform that offers ASX-listed stocks.
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