The share prices of 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) have risen in reaction to the RBA cut.
At the time of writing the CBA share price is up 0.85%, the Westpac share price is up 0.7%, the NAB share price is up 0.4% and the ANZ share price is up 1%.
There are several reasons why the big four ASX banks could be getting a boost.
Firstly, the banks may be able to increase their net interest margin (NIM) – a key profit measure which is how much the banks lend out money compared to how much it costs for them to borrow money. ANZ has already announced it will drop its loan interest rate by 0.18%, meaning it benefits by 0.07%. However, CBA has opted to pass on the full cut. It will be interesting to see what Westpac and NAB do in response to the moves of the first two movers of the big ASX banks.
Second, a lower interest rate should slightly decrease the chance of bad debts occurring from borrowers. It's easier to repay your mortgage if the monthly repayment is a little less. This may also have a pleasing effect for the wider economy as people may have more money to spend on other products or services.
Third, with interest rates offered by term deposits and savings accounts likely to drop lower, it means that the income offered by dividend shares like the banks will be comparatively more attractive. So that means investors may prefer to own big bank shares rather than obtain a term deposit from them.
Foolish takeaway
I hope that the RBA's move has a lasting effect on the economy. It was probably too quick to reduce rates a few years ago, but hopefully this move helps stop a recession occurring.
