Why is the CBA and NAB share price stumbling today?

Posted: 16 November 2021 1:15 pm

Shares in the major banks are still up 25-50% over the last 12 months despite today's falls.

The heavyweight banking sector is dragging the overall ASX indices today. Each of the Big Four banks, Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), National Australia Bank (ASX: NAB) and ANZ (ASX: ANZ), were all trading between 0.2% and 0.7% lower at the time of writing.

What is weighing down on bank stocks?

Bank stocks are seeing some amount of profit taking following annual results by 3 of the Big Four banks in recent weeks. That weak sentiment seems to have continued on expectation that interest rate rises may come earlier than expected.

There was some indication of this on Tuesday, when Westpac increased its fixed home loan rates for the third time within a month. It increased rates between 0.10 and 0.35% on both owner-occupier and investor loans, with the changes including loans at subsidiaries StGeorge, Bank of Melbourne and BankSA.

The hike follows similar moves from rivals NAB and ANZ last week and means that none of the major banks now have advertised fixed home loan rates under 2%. The move by the biggest players in the home loan market is a good indication of where mortgage rates are heading, in general.

The Reserve Bank of Australia also shifted its own stance earlier this month by indicating that a lift in the benchmark cash rate from its record low of 0.10% may happen slightly earlier than expected, in 2023. However, analysts believe this could occur as early as next year, given the increasing likelihood of the US Federal Reserve increasing its rates.

Mortgage pressure

While a shift from ultra-low fixed rates is beneficial for bank margins, the lenders would generally be at a disadvantage in a rising rate scenario.

Firstly, much of the gains in the booming housing market have come on the back of record low interest rates and this will gradually slow as rates rise, impacting growth prospects for the major banks. Recent earnings announcements from Westpac, NAB and ANZ revealed how dependent their financials are on the home lending market.

Secondly, rising rates could spell repayment risks for the lenders in the future. According to recent research by the University of New South Wales, about 42% of households in Australia are already facing mortgage stress based on how much money is left after their normal expenditure compared to their income.

Financial regulators have already been anxious about rising mortgage debt in Australia, prompting the Australian Prudential Regulation Authority (APRA) to last month tighten lending standards by increasing the minimum interest rate buffer when banks assess home loan applications.

Investors, worried about the impact of the uncertainty on the housing market, are responding by booking some of the profits from the recent run up in bank shares. Banks were among the best performing stocks on the ASX over the last 12 months, although prices have stumbled over the last month.

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