Why are the CBA and ANZ share prices in the red?

Posted: 6 October 2021 1:44 pm
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Shares in the major banks have risen more than 60% in the last 12 months, so why are they retracting today?

The ASX 200 is in the red today, thanks largely to the heavyweight banking sector.

Commonwealth Bank (ASX: CBA) was among the worst performers on the ASX, slipping 2.3% to 103.04, while Westpac (ASX: WBC), National Australia Bank (ASX: NAB) and ANZ (ASX: ANZ) were also trading between 0.2% and 0.5% lower at the time of writing.

What is weighing down sentiment in bank stocks?

Bank stocks are under pressure following an earlier than expected announcement by the Australian Prudential Regulation Authority (APRA) on Wednesday tightening lending standards by increasing the minimum interest rate buffer it expects banks to use when assessing home loan applications.

To try and slow down Australia's booming house prices, the prudential regulator has written to all authorised deposit-taking institutions (ADIs) asking them to lift serviceability criteria from 2.5% to 3% above the current interest rates.

That basically means banks will have to ensure people applying for a new home loan are capable of paying a much higher rate when interest rates inevitably rise in the future.

The decision "reflects growing financial stability risks from ADIs’ residential mortgage lending" and was supported by other members of the Council of Financial Regulators, APRA said in a statement.

“In taking action, APRA is focused on ensuring the financial system remains safe, and that banks are lending to borrowers who can afford the level of debt they are taking on – both today and into the future," APRA Chair Wayne Byres said.

Property risks

APRA’s decision reflects growing anxiety among regulators, including the Reserve Bank of Australia, the Australian Securities and Investments Commission and the Council of Financial Regulators about the heating up of the property market.

Earlier this month, data from Corelogic showed house prices across the capital cities rose by more than 20% in the past year, their fastest pace since 1989, putting pressure on potential buyers.

It comes at a time when interest rates are at a record low, and could spell risks when rates rise in the future. According to recent research by the University of NSW, 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.

APRA’s move to tighten lending standards is likely to have some impact on the major banks, which see the biggest proportion of their earnings contributed by the mortgage business. The COVID lockdowns have already led to the major banks having to shoulder the burden of loan repayment deferrals and fee waivers.

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 remain among the best performing stocks on the ASX over the last 12 months, with their values rising more than 60% over that period.

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