The market's negative response to the Reserve Bank's latest interest rate cut does not paint a pretty picture for the big bank stocks. After having traded higher earlier in the period, shares of each of Australia's big banks retreated considerably when the RBA slashed interest rates to a record low of 2 per cent.
Commonwealth Bank of Australia (ASX: CBA), for instance, had traded 1.9% higher earlier in the day but was trading down 0.4% later in the session. Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB) were also trading in the red, while Australia and New Zealand Banking Group (ASX: ANZ) has given up a large portion of its intraday gains.
Of course, it wasn't the decision itself that sparked the sell-off, but rather the commentary that came with it. While the RBA saw another interest rate cut as being necessary after having left them untouched in the last two meetings, it neglected to include a key phrase which appears to have spooked the market.
When it met in April it said that: "Further easing of monetary policy may be appropriate over the period ahead".
Such commentary was not provided in the latest announcement, all but confirming the belief amongst economists that the RBA's latest easing cycle has drawn to a close. Many believe that for interest rates to fall below 2 per cent, the Australian economy would need to take a significant turn for the worse.
Given that the RBA referred to 'improved trends in household demand over the past six months and stronger growth in employment', such a scenario appears unlikely.
Has the Big Banks reign come to an end?
Expectations of lower interest rates have been one of the key drivers behind the banks' strong rallies.
Not only can lower lending rates lead to stronger loan growth and lower loan impairment charges (that is, bad debts), lower interest rates also made the banks' fully franked dividend yields all the more appealing.
Indeed, each of the banks' yields are still looking tastier than most bond yields or returns from term deposits, but the stocks themselves are looking significantly overpriced, which may begin to deter investors.
That would explain their sudden collapse this afternoon. To make matters even worse for the banks' shareholders, Westpac recently warned investors not to expect any further increases in the banks' dividend payout ratios, citing the need to have sufficient capital moving forward. While ANZ provided a more optimistic outlook when it reported its first-half earnings today, there are certainly ominous signs that the banks' record-breaking run may finally be drawing to a conclusion.
