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Lower yields, falling property and slowing growth putting pressure on ASX bank shares

Bank shares

There seems to be a lot of bad news about for Australia’s big 4 banks right now.

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) are all trading in the red on Monday afternoon.

Is this the end for the big 4 ASX Bank shares?

There are a couple of factors that come into play in painting a bearish picture for Australian banks.

Firstly, key bond yields such as the US 10-year treasury bond yield has fallen to its lowest levels in more than a year. This follows the Federal Reserve saying it was seeing slower growth in the economy and no longer expects to raise interest rates in 2019.

Bond yields play an important factor as they define the profitability of financial companies that make money from lending. As interest rates rise, profitability on loans increases as there is a greater spread between the federal funds rate and the rate the bank charges its customers. And vice versa.

Secondly, Australia’s economy has slumped into per-capita recession, meaning the country is dependent on population growth to fuel economic growth. Our gross domestic product for the three months to the end of December grew only 0.2%, lower than the 0.3% forecast. Strong economic growth is a bedrock to the performance of banks and financial services. Such underwhelming results will create headwinds when it comes to growing the bottom line.

Finally, property prices. Australian home values have returned to levels last seen in late 2016. This is fuelled by decreased investor activity, with local investors struggling to obtain finance due to the bank’s credit squeeze. As well as decreasing consumer confidence about buying homes and uncertainty around the upcoming federal election.

Foolish takeaway

Despite the negative factors that undermine the bank’s performance, I believe Australia’s big 4 banks are likely to remain resilient in the face of such headwinds.

For example, in Commonwealth Bank’s FY18 half-year results, the business reported volume growth in the core business such as home loan volumes increasing by 4% and business lending up by 5%. The main weigh on earnings will be due to higher funding costs and home loan switching.

As long as the Australian unemployment rate remains stable at the 5% mark, I don’t think the banks should suffer too hard.

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Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. 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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