All eyes are on the Reserve Bank of Australia (RBA) today with the market expecting it to cut interest rates to fresh record lows.
If it doesn't happen this month, it will more than likely happen in August. While that's good news for borrowers and the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index, which is rallying on the prospect of cheap money, not all will be celebrating.
One group that will be feeling the pinch are the banks as falling interest rates put pressure on margins and earnings.
The big bank with the most to lose
However, not all will feel the same amount of pain and the analysts at Macquarie Group Ltd (ASX: MQG) is predicting that National Australia Bank Ltd. (ASX: NAB) is most exposed to the rate threat among the big four banks.
The broker estimated that two rate cuts, which will take the official cash rate to 0.75%, will shave around $500 million off NAB's net profit in 2020, reported the Australian Financial Review.
That would represent a 9% hit to the bank's net profit of $5.7 billion from the latest financial year – and that is not an insignificant impact, particularly given that NAB's share of the mortgage market is going backwards and the banks are facing pressure to increase their cash buffer for their New Zealand operations.
While the risk of a dividend cut isn't big, these worries could grow with each interest rate cut from the RBA.
Earnings threat to other banks
NAB's share price is underperforming and shareholders won't be looking forward to more rate cuts. The stock is down by more than 2% over the past year, about the same as the Westpac Banking Corp (ASX:WBC) share price, while the Commonwealth Bank of Australia (ASX: CBA) share price is up 13% and the Australia and New Zealand Banking Group (ASX: ANZ) share price is close to 2% in the black.
If you are wondering which bank is the second most impacted by 50 basis points worth of rate cuts, Macquarie believes it's CBA as it estimates the cuts will lower net profit by 2.5% in FY20 and 7.4% in the following year.
Westpac is in third spot as it stands to lose 2.2% and 5.8% over the two financial years, respectively.
The reason for the differences is due to a bank's reliance on retail deposits to fund their lending business.
What's alarming to ASX bank investors is the prospect that the RBA could lower rates below the 0.75% band. There's a small but growing group of economists that's tipping rates to fall to 0.5%.
Who would have thought that the RBA could overtake the housing market as a bigger risk to bank profits!
