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When global shares drop, are ASX banks like CBA safe or risky?

Global shares are dropping across various markets.

iShares S&P 500 ETF (ASX: IVV) is down another 1% in early trading and Vanguard MSCI Index International Shares ETF (ASX: VGS) is down 0.75%.

It’s easy to see how a slowdown in the global economy could affect many global shares and indeed some local shares too like BHP Group Ltd (ASX: BHP) and WiseTech Global Ltd (ASX: WTC).

But what about ASX banks like 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)?

A large majority of the earnings from our large ASX banks come from Australia (and New Zealand), it doesn’t directly rely on the global economy. People need to keep paying their mortgage whether global trade is rising, flat or declining a little.

In terms of the banks’ net interest income, I think banks are relatively safe in the short-term.

But, there is a longer-term risk to the banks if a short-term share market drop turns into a global economic decline. Australia’s economy is quite strongly linked to the strength of the global economy so indirectly it could eventually cause some Aussies to see a loss of income which could mean banks not receiving borrower mortgage payments.

Borrowers will prioritise paying their mortgage more than anything else, so even in a downturn mortgage payments will keep flowing to the banks – but earning a 2% net interest margin doesn’t amount to much if you’re writing off 100% of a bad loan.

All of the major banks are down more than 1.25% this morning, the ANZ share price is down around 2%.

Foolish takeaway

Commonwealth Bank shares have dropped 4% since the pre-open price on Tuesday. The CBA share price is still up compared to where it was just a month ago – so it doesn’t strike me as a bargain buy today, although a few more days of declines may make it more attractive.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited and WiseTech Global. The Motley Fool Australia has recommended Vanguard MSCI Index International Shares ETF. 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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