Why are the CBA and Westpac share prices stumbling?

Shares of the major banks have been listless so far this year - ranging from a gain of 3% to a drop of 12% over that period.

Despite a bounce back in the overall market, the Big Four banks are continuing to underperform for a second straight day.

Shares in Westpac (ASX: WBC) were the worst performing, down nearly 3%, while rivals Commonwealth Bank (ASX: CBA) and National Australia Bank (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) were each trading around 2% lower.

Why are the banks under pressure?

Investor sentiment in the top banks has turned bearish after the Reserve Bank of Australia on Tuesday 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%.

Many economists are forecasting another 50 basis points next month as the central bank goes hard against inflation, with the cash rate expected to climb to around 2% by the end of the year.

The central bank justified its aggressive move on Tuesday saying it was necessary to tamp down on inflation which has increased significantly and higher than expected earlier, but the decision has roiled the trading environment for the major banks.

So far, Westpac has become the first big bank to pass on the increase in full to new and existing variable home loan customers. Most of its peers are expected to follow suit within the next day or two.

But it is raising concern among investors because this comes at a bad time for the banking sector. Each of the big four banks last month outlined pressure on margins amid rising competition in the key home loan and business loans market. They are also grappling with rising costs in the form of higher wages, more staff to boost processing times and investment in technology.

Rising stress

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.

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.

According to Finder, if banks pass on Tuesday's hike in full, the average borrower with a $600,000 mortgage and 30 years left to pay on their loan can expect their repayments to rise by almost $2,000 annually.

While most borrowers are ahead on their repayments, the risk of defaults will increase if rates continue to rise in the near future, as is being predicted by economists. APRA boss Wayne Byres last week warned of 'pockets of stress" appearing in the mortgage market.

Credit reporting agency Equifax recently said it was already observing an increase in arrears in personal loans, with those overdue for more than 90 days rising to levels not seen since May 2020. It also noted that around half a million home loan customers also hold personal loans.

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.

Considering buying CBA or WBC 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.

Choose from the dozens available for Australian investors. Compare the features and fees from the plethora of trading platforms available for Australian investors.