The ASX banking sector has been steadily recovering since the 2018 Financial Services Royal Commission. Shares in the Aussie banks were hammered as round after round of inquiries painted a dismal picture of process and ethics within the sector.
However, we recently saw the Commonwealth Bank of Australia Ltd (ASX: CBA) share price hit a new 52-week high of $91.05 which shows investors were happy to buy based on the fundamentals a few weeks ago. But the Big Four banks were smashed in yesterday's trade and the CBA share price slumped 2.53% lower. So, how is the ASX banking sector looking as we enter this big unknown of the coronavirus outbreak?
Why ASX banking shares could be under pressure this month
Perhaps it is easiest to start with the Reserve Bank of Australia (RBA) interest rate cut. On Tuesday, Australia's central bank cut rates to a new record low of 0.50%. While it's easy to blame COVID-19, the reality is that this cut was probably coming at some point in 2020. Economists were realistic about at least one rate cut before the mid-way point of 2020.
One concern for ASX banking share prices is the low interest rate environment. While the banks could have potentially gained from not passing on a rate cut to their customers, that wasn't to be. All of the Big Four banks passed on the 25 bps cut to homeowners in a move that is sure to make the government happy. However, that also lowers the chances of any profitability from low rates.
One big risk facing ASX bank shares is rising funding costs coupled with lower lending rates. This spells trouble for the banks' net interest margins (NIMs). Let's not forget as well that the regional banks like Bendigo and Adelaide Bank Ltd (ASX: BEN) are even more vulnerable given their weaker market position.
While the threat of the coronavirus is a concern for public health, it is also likely to affect global economic growth. It's not unrealistic to foresee a scenario with significant defaults in Australian home loans and business loans. If businesses can't get goods from China, they can't make sales and therefore, cash flow. Combine this with significant leverage in the economy and ASX bank shares could fall lower as impairments climb.
Foolish takeaway
It's certainly not a doomsday scenario for ASX bank shares at the moment. However, the coronavirus looks all but certain to challenge companies and test credit risk in our economy.
