Why ASX 200 bank shares are in the spotlight

All 4 of the banks posted gains following the RBA’s afternoon announcement on a rate increase yesterday.

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Key points

  • ASX 200 banks in focus following RBA cash rate hike 
  • Rising interest rates tend to increase banks' gross earnings 
  • Increased bad debts and lower lending levels will throw up some headwinds 

S&P/ASX 200 Index (ASX: XJO) bank shares are in the spotlight today following yesterday’s 0.25% lift in the official cash rate by the Reserve Bank of Australia (RBA).

The increase – announced at 2:30 PM AEST – was the first in 11 years and brings the cash rate to 0.35% from the historic low of 0.10%.

And we can expect a series of additional rate increases ahead.

According to RBA governor Philip Lowe, “The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead.”

While higher rates tend to drag on some shares, particularly growth shares priced for distant future earnings, investors are keeping an eye on ASX 200 bank shares to see how they’ll respond, and how their share prices may hold up.

How did the ASX 200 bank shares perform following the RBA’s announcement?

There were 90 minutes of trading left following the RBA’s rate hike and guidance announcement.

During those 90 minutes, the ASX 200 dropped 0.2% lower.

The ASX 200 bank shares, however, went the other way.

Commonwealth Bank of Australia (ASX: CBA) gained 0.3% during the final 90 minutes of trade. Australia and New Zealand Banking Group Ltd (ASX: ANZ) shares also gained 0.3%. National Australia Bank Ltd. (ASX: NAB) edged up 0.03%. And the Westpac Banking Corp (ASX: WBC) share price gained 0.4%.

All 4 of the ASX 200 bank shares also opened well into the green this morning, though they’ve been sliding heading into lunchtime with ANZ and CBA now dipping into the red.

So why are investors keenly watching the banks?

According to S&P Global Ratings (courtesy of The Australian), rising interest rates tend to boost the banks’ gross earnings, though they’ll face some headwinds from a potential increase in bad debts and lower lending levels:

We consider that if the official cash rates increase, banks are likely to reprice their assets ahead of a commensurate increase in their borrowing costs. Conversely, banks’ credit losses are also likely to increase as interest rates rise. In particular, the most highly leveraged households will struggle to service their debt at higher interest rates.

RBA rate rise already being passed on

As you’d expect, the RBA’s rate hike will likely be passed on from all the ASX 200 bank shares to their customers.

However, Finance Brokers Association of Australia managing director Peter White says it’s imperative the banks don’t lift their lending rates by more than the official cash rate increase.

According to White (quoted by The Australian Financial Review):

Now that rates have started to rise, we must shine a spotlight on the future behaviour of the banks. From past experience we know that some banks will look to use these opportunities to maximise their profits at the expense of mortgage holders.

It is imperative that banks do not increase their rates outside of increases in the costs of funds, because many Australians cannot afford sudden and steep rate increases.

CBA was the first of the ASX 200 bank shares to act on the RBA’s rate hike, announcing a 0.25% increase in its standard variable rates. The increased rate will take effect on 20 May.

Commenting on the move, CommBank’s group executive for retail banking, Angus Sullivan said:

This is an important time to support customers as some may not have experienced an interest rate increase since they took out their loans. We are here to help customers who have loans and are considering how repayments might change. Some options available to help our customers manage repayments include fixing or splitting loans or setting up an offset account.

Westpac wasn’t far behind.

The ASX 200 bank’s Twitter page reveals:

Westpac announces interest rate changes for customers.

Following the Reserve Bank of Australia’s (RBA) decision to increase the cash rate by 0.25%, Westpac has today announced a range of interest rate changes for home loan and consumer deposit customers.

From 17 May Westpac will increase home loan interest variable rates by 0.25% per annum (p.a.) for new and existing customers.

Savers were given a welcome boost with Westpac increasing interest rates for “selected consumer deposit accounts Westpac Life and Westpac 55+ and Retired by 0.25% p.a.”

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking Corporation. 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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