What exactly is going on with ASX 200 bank shares and the RBA rate rise?

The banks could come under pressure if the Aussie housing market falls.

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Key points

  • ASX 200 bank shares are all down sharply since Tuesday’s rate hike announcement 
  • High inflation forecasts could see the RBA increase rates aggressively this year 
  • Aggressive rate increases could impact the banks’ lucrative mortgage lending 

S&P/ASX 200 Index (ASX: XJO) bank shares are not feeling the joy from the Reserve Bank of Australia’s 0.50% interest rate hike decision on Tuesday.

With all of the ASX 200 bank shares deep in the red today, the S&P/ASX 200 Financials Index (ASX: XFJ) is down 2.8%, more than twice the 1.1% decline posted by the ASX 200.

And the big banks are all underperforming the financial index.

How are the ASX 200 bank shares performing?

In late morning trade, here’s how the ASX 200 bank shares stack up:

  • Commonwealth Bank of Australia (ASX: CBA) share price is down 4.1%
  • Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price is down 2.7%
  • Westpac Banking Corp (ASX: WBC) share price is down 3.8%
  • National Australia Bank Ltd (ASX: NAB) share price is down 3.0%

All of the big banks sold off in the 90 minutes of trading that remained following the RBA’s Tuesday rate hike announcement. And all of them lost ground yesterday.

Putting the numbers together, since 2:30 pm AEST when the RBA surprised markets with the hawkish rate hike, the CBA share price is down 9.3%, ANZ shares have lost 5.8%, Westpac is down 10.6%, and the NAB share price has fallen 7.9%.

What’s going on?

ASX 200 bank shares receive both tailwinds and headwinds from increased interest rates.

With rates at near zero this past year, the banks saw their net interest margins squeezed.

If rates move gradually higher, so too do their profit margins. Matt Comyn, CEO of CommBank, estimates that the banks’ net interest margins will increase by 0.04% for every 0.25% the RBA boosts the cash rate.

But the selling action we’re seeing among the ASX 200 banks since Tuesday afternoon’s rate hike tells us the tailwinds are winning out for now.

That’s likely because the RBA increased rates by more than consensus expectations, and governor Philip Lowe sounded some hawkish notes about further rate increases ahead in 2022.

That not only increases the banks’ own funding costs, it could also negatively impact their lucrative mortgage lending, with the potential for an increase in bad debts alongside fewer new loans being issued.

And falling house prices have historically seen the banks struggle.

Richard Wiles, head of Australian research at Morgan Stanley, pointed out that ASX 200 bank shares are likely to underperform if the RBA moves aggressively with rate increases.

“Much of the benefit of higher rates is factored into the outlook,” he said. “Housing loan growth is likely to slow, inflation is putting more pressure on costs, and a quick and aggressive tightening cycle increases tail risks.”

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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