The S&P/ASX 200 (INDEXASX: XJO) index is looking cautiously bullish as the market broke a three-day losing streak on Wednesday. Things are also looking up for the ASX 'Big Four' banks as property markets stabilise and the Reserve Bank of Australia (RBA) hints at more interest rate cuts.
Are the banks a buy in the current market?
The Commonwealth Bank of Australia (ASX: CBA) will be the main point of discussion in this article, but the themes and economics are applicable to all banks.
The minutes of the last RBA meeting in early July cited that the outlook for the global economy remained reasonable, although the risks from the international trade and technology disputes remained high. Growth in trade had remained weak and inflation had generally remained low. The RBA board came to agree that further improvements in the labour market would be required for wages growth to increase and therefore decided it was appropriate to lower the cash rate by 25 basis points.
The key concern was the domestic jobs market and forward-looking indicators such as job advertisements and employment intentions suggested that growth in employment would moderate over coming months.
For financial markets, higher equity prices owed primarily to a lowering of interest rates. I believe as both domestic and global monetary policy remains dovish at large, we will continue to see the markets tread cautiously forward. This is favourable for the share price of our banks.
At the same time, banks are expected to pass the rate cuts to their consumers. CBA and NAB have been the most generous to mortgage holders, passing on 88 per cent. This does impact their net interest margins, with little breathing room as rates are looking to go even lower.
There is finally some good news coming out of the property markets. The RBA minutes cited that "housing prices stabilised in June in these cities [Sydney and Melbourne] and auction clearance rates had picked up further …" and a recent note out of ANZ Bank suggested an optimistic outlook for 2019/20 with potential for dwelling prices to finally turnaround.
Foolish takeaway
While interest rates are likely to head lower, the domestic economy is looking buoyant on the back of solid unemployment figures and more affordable borrowing costs. I believe a combination of strong equity, market sentiment, lower interest rates and a turnaround in property markets will see our banks head higher in the short-to-medium term.
