Shares in our big bank stocks recorded gains on Tuesday even after Commonwealth Bank of Australia (ASX: CBA) upped pressure on its peers by slashing rates to grab market share.
The CBA share price closed 0.1% higher at $82.10, while the Westpac Banking Corp (ASX: WBC) share price added 0.4% to $29.92, the Australia and New Zealand Banking Group (ASX: ANZ) share price jumped 1.3% to $28.28 and the National Australia Bank Ltd. (ASX: NAB) share price improved 0.6% to $29.92.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index closed flat as gains by large financials were offset by weakness in the mining and energy sectors.
Fixed-rate loans getting cheaper
Coming back to CBA, the Australian Financial Review reported that our largest mortgage lender has slashed its fixed rate loans by as much as 90 basis points (bps) as the big lenders fight for new business.
The bank's one- and four-year fixed rate has been lowered by 60bps to 3.29% and 3.49%, respectively, and mortgage brokers quoted in the story said this is a reflection of CBA's growing expectation of an interest rate cut by the RBA when our central bankers meet next Tuesday.
That isn't technically correct. Fixed longer-term rates are not directly influenced by the cash rate but by similar-dated government bond yields.
However, it's worth noting that wholesale funding has gotten cheaper recently and global bond yields are very depressed.
Westpac also fighting for market share
The cut by CBA follows Westpac's move to lower the serviceability test for borrowers for the second time in 10 weeks to 5.35% from 5.75%.
This means Westpac is able to lend more to home buyers as borrowers will be stress-tested against the lower hurdle rate by the bank when it is determining the maximum loan amount they can take out.
Westpac's move is also seen as a push for market share and the rising competitive tension is good news for borrowers – although that will probably come at the expense of shareholders.
Rate cuts means smaller profit margins for the banks and the sector has been under margin pressure for a while now.
Dividends at risk
The growing chance of another RBA rate cut and heating-up in competition for borrowers mean bank margins aren't about to improve anytime soon even though the residential market appears to have turned a corner.
Investors should be concerned as weakening margins increases the chances that some of the banks may have to reduce their dividends.
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