Listed equities of ASX banks have taken a hit on Wednesday following the Reserve Bank of Australia (RBA)'s decision to hike base rates in its policy meeting yesterday.
At its meeting, the RBA moved to increase the cash rate target by 50 basis points to 85 basis points (0.85%), citing inflation as the main undercurrent for its decision.
"Today's increase in interest rates will assist with the return of inflation to target [2–3%] over time."
Nonetheless, banks have felt the brunt of the RBA's move with the S&P/ASX 200 Financials Index (ASX: XFJ) sliding 270 basis points towards 3-month lows today. Meanwhile, the Vaneck Australian Banks ETF (ASX: MVB) has curled down by more than 3% to $29.40.
The downward momentum appears to have spilt over to the Bendigo and Adelaide Bank Ltd (ASX: BEN) share price as well.
What's all the fuss about?
A spike in commercial interest rates is more often than not a positive for banks' net interest margins (NIMs) in the near term.
However, as Credit Suisse analysts pointed out in their reaction to the RBA, in the long-term, such moves will likely impact asset quality – in particular, house prices.
Input from analysts at various financial services firms note that there is set to be an impact to net interest income with every increase in NIM, The Australian reports.
Despite the accretion to NIMs and net income, these are offset by headwinds faced on the funding side, meaning the cost of finance, debt and equity will increase for banks as well.
Warren Buffett's mentor, Benjamin Graham, quoted that "in the short run, the market is a voting machine but in the long run it is a weighing machine".
That means the market will seek to price in any changes to a company's stock based on its long-term outlook by evaluating the substance of the company.
With the longer-term outlook now shifting for ASX banks, investors appear nervous on where to position in the sector for the impeding rates-rises. Evidently, what matters is the underlying fundamentals of a business.
After a strong run this year to date, the Bendigo Bank share price has danced around the $31 level for a number of weeks before the rug was pulled out today.
As such, it has now clipped a 4.2% loss for the last 12 months and a 3% loss this year to date.
