Are the CBA and ANZ share prices set to go lower?
Shares of the Big Four banks have tumbled 11-17% in the last month.
Banking shares are again in focus as they drag the Australian market lower on Thursday, continuing their poor trading over the last few months.
The 4 major banks, Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), National Australia Bank (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) had slipped more than 1% each at the time of writing.
Even shares in Macquarie Group (ASX: MQG) were down 0.7%.
Why are the CBA and ANZ stock prices under pressure?
Investor sentiment in the top banks has remained bearish ever since the Reserve Bank of Australia stunned the market with a higher than expected 50 basis points lift in its benchmark rate earlier this month. That has contributed to bank shares sliding between 11% and 17% over the past month.
Those fears have surfaced again after hawkish comments from the US Federal Reserve Chairman Jerome Powell overnight. He said the US central bank will not let the economy slip into a "higher inflation regime" even if it means raising interest rates to levels that put growth at risk.
His statement comes on the same day data showed that the US economy contracted by 1.6% in the March quarter.
Investors have been spooked in recent weeks that aggressive rate increases by central banks around the world to tame surging inflation will drag down the major economies into a recession. This is at a time when the Russia Ukraine conflict and global supply chain disruptions are already weighing heavily on consumers and businesses.
Aggressive rate hikes by the US Fed could also force the hand of other major central banks, including in Australia, to similarly tighten monetary policy, hurting growth prospects for local banks.
Dashed hopes
Economists widely expect the RBA to raise rates by another 50 basis points at its board meeting next week, and by a similar amount in August.
That would dash hopes in the banking sector, which had expected rates to rise gradually, giving them a solid margin buffer at a time of rising wage costs and increased spending on technology.
The downside of rapid rate rises is that consumers turn cautious and cut down on spending and borrowing. In the case of Australian banks, the biggest impact will be felt on their key home loans business, which accounts for the biggest contribution to their earnings.
Concerns have also centred on the risk of rising defaults, as higher interest payments squeeze borrowers at the same time that rising food, petrol and electricity prices hurt consumer wallets.
Meanwhile, rising global rates also mean Aussie banks have to pay more interest on their own wholesale borrowings from overseas, which would result in pressure on net interest margins (NIMs).
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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