Why is the NAB and ANZ share price stumbling today?

Posted: 24 January 2022 12:38 pm
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Shares in the major banks rose 1%-15% over the last 12 months but are struggling with the rest of the market today.

The heavyweight banking sector is a drag on the overall ASX indices today.

Of the Big Four banks, National Australia Bank (ASX: NAB), Westpac (ASX: WBC) and ANZ (ASX: ANZ) are down more than 0.5%, while Commonwealth Bank (ASX: CBA) has seen volatile trading and was marginally higher at the time of writing.

Why are investors nervous about bank stocks?

Banks are the most invested sector in the Australian market but it seems investors are becoming nervous due to the looming increase in global interest rates.

Typically, rising interest rates are beneficial to banks as they provide a bigger interest margin (the gap between interest earned on loans and paid to depositors) and bank stocks did lift in recent months on that likelihood.

But that change in trend could easily turn negative for Australian banks, which rely on overseas markets for a large part of their funding. Rising interest rates would increase their cost of funds, prompting them to lift their lending rates sharply.

This would be a problem at a time when the big banks are struggling to hold on to market share amid slowing growth in house prices and mortgage processing bottlenecks.

The rapid spread of coronavirus infections across Australia this summer, along with other factors such as supply chain issues, has also led to a slowdown in business activity. This means that business lending is also expected to drop amid a slowing economy.

Mortgage hit

But the biggest worry for bank investors is the likely hit of higher rates on the mortgage market, which accounts for the major share of earnings for the Big Four banks.

Economists have warned in recent weeks that the likelihood of multiple rate hikes from the US Federal Reserve means Australia’s own central bank will have to lift rates from a record low 0.1%, previously not expected until 2024, to later this year.

In total between the US and Australia, the banks could face 7 hikes in 2 years.

Higher rates could therefore spell rising repayment risks for the lenders.

According to research by the University of New South Wales last year, about 42% of households in Australia were already facing mortgage stress based on how much money is left after their normal expenditure compared to their income.

It would also slash growth in the booming housing market, hitting growth prospects for the major banks.

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