Risks in the banks like Commonwealth Bank of Australia (ASX:CBA) may be falling

The share prices of our big retail banks may be on the nose today, but there’s a slim ray of sunshine for embattled shareholders after credit ratings agency Standard’s and Poor (S&P) said confidence in these financial giants has not been eroded by the Banking Royal Commission.

If S&P is right, this is a big deal for the big four even as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) all lost at least 0.4% of their value in afternoon trade.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has only inched down 0.1% as a rally in Telstra Corporation Ltd (ASX: TLS) and the big miners saved the market from a bigger fall.

But I have to give credit where credit is due. The big banks seem to be weathering the shocking revelations at the Hayne Royal Commission into bad lending behaviour.

S&P noted that depositors and overseas investors funding these giants in the wholesale market are unperturbed by perceptions of our banks-gone-wild, according to an article in the Australian Financial Review.

This is key because our banks are heavily reliant on offshore capital to fund their operations, and a growing unease among international investors to provide further funding could trigger a painful credit crunch.

The loss of confidence is potentially a bigger issue for shareholders than a slowdown in credit growth and the weakening housing market.

These macro headwinds are largely (but not totally) reflected in the current share prices of the underperforming bank stocks, but I don’t believe the loss of confidence is quite in the valuation. Investors can at least seek some comfort in S&P’s words as the sell-off in the sector may not be as deep or prolonged as some fear.

Wealth manager AMP Limited (ASX: AMP) is a whole different story and S&P has made no comments about the company.

What I do find disconcerting though is that the confidence of S&P towards the big banks doesn’t gel with the fact that interbank rates are blowing out relative to the official cash rate set by the Reserve Bank of Australia (RBA).

So while our big banks should still have reasonably easy access to the wholesale funding market with S&P keeping its credit rating on the sector, mortgage rates could still rise.

What’s more, the more hawkish interest rate posture by the US Federal Reserve will drive bond yields (and global funding costs) higher.

The risk of a harder than expected landing for our housing market just got notched up a little more.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, Telstra Limited, and Westpac Banking. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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