Why are the CBA and ANZ share prices stumbling today?

Posted: 11 January 2022 1:53 pm
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Shares in the major banks rose 20-25% over the last 12 months but are sliding during today's trading.

The heavyweight banking sector is dragging the overall ASX indices today.

Commonwealth Bank (ASX: CBA) and ANZ (ASX: ANZ) shares have dropped more than 1%, while Westpac (ASX: WBC) and National Australia Bank (ASX: NAB) were also down more than 0.5% at the time of writing.

What is weighing down on bank stocks?

Investor sentiment in bank stocks is likely being impacted by 2 key issues: the impending increase in global interest rates and the surging infections in Omicron coronavirus cases.

Typically, rising interest rates are beneficial to banks as they provide a bigger margin buffer to lenders, and bank stocks have lifted in recent months on that likelihood.

But that trend could also turn out to be somewhat negative for Australian banks, which rely on overseas markets for a large part of their funding, because it increases their cost of funds.

This is particularly a problem in the key housing loan market, where the big banks are increasingly having to battle for market share amid slowing growth in housing prices, mortgage processing bottlenecks and difficulty in retaining customers.

In 2021, the banks had the benefit of ultra-cheap funding from the Reserve Bank as it eased policy during the pandemic, but this will not be the case this year.

The prudential regulator has also attempted to cool the housing market by recently raising the buffer rate, amid concerns about rising levels of indebtedness in Australia.

Earnings worries

Most analysts expect a slowdown in housing credit growth across the sector this year.

That will have a direct impact because the housing market is the key profit earner for the big banks.

“We remain cautious on the outlook for mortgage margins given Westpac’s second-half 2021 exit net interest margin, still strong mortgage industry returns and increased competition from second-tier players despite the term funding facility program ending,” JP Morgan analysts said in a recent note.

They warned of further pressure on retail banking returns due to funding costs and competition.

There had been expectation that business credit would rise fast enough to compensate for this slowdown in the housing market.

Indeed, RBA data showed business loan growth accelerating at 7.3% in the year to 30 November, the fastest annual clip since April 2016.

However, the rapid spread of the Omicron variant in Australia has knocked down those hopes.

Surging case numbers have led to a slowdown in business activity due to a variety of factors including supply chain issues and staff shortages due to isolation requirements.

Investors are worried this will cause a dip in earnings and impact the share prices of the big banks, which had been strong performers in 2021.

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Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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