Why are ASX 200 bank shares having another day to forget?

As interest rates head higher, the number of distressed mortgage holders is expected to rise.

| More on:
Bank building with word Bank on it.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • ASX 200 banks shares have struggled amid the spectre of potentially aggressive rate rises 
  • APRA considers more than 23% of new mortgages to be risky 
  • APRA has instructed the banks to closely monitor their housing lending risks 

S&P/ASX 200 Index (ASX: XJO) bank shares are having another rough day of it, as investors remain cautious ahead of tonight’s interest rate decision by the US Federal Reserve.

In late afternoon trading, the ASX 200 is down 0.6%, with all but one of the ASX 200 bank shares trailing the benchmark.

Down 0.6%, the Commonwealth Bank of Australia (ASX: CBA) share price is the best performer among the big four banks at the time of writing.

Meanwhile, the Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price is down 1.3%; the National Australia Bank Ltd. (ASX: NAB) share price is down 1.2%; and Westpac Banking Corp (ASX: WBC) shares are down 1.1%.

Why are ASX 200 bank shares underperforming?

The big banks can benefit from aspects of rising interest rates. Mainly, they’re able to increase their net interest margins as rates climb from historic lows.

However, rising rates can negatively impact the demand for new mortgage loans. And, crucially, higher rates could see a spike in the number of bad debts held by ASX 200 bank shares.

Today’s underperformance could be tied to the latter issues, as investors mull over the implications of a precautionary letter sent to the banks yesterday by Australian Prudential Regulation Authority (APRA) chair Wayne Byres.

What is APRA concerned about?

The financial regulator is concerned that rising interest rates could result in a rise in bad debts.

As the Australian Financial Review noted, APRA’s March quarter data indicated that 23.1% of new mortgages are considered risky, with debt-to-income ratios of at least six times. While that’s down from the 24.3% in the December quarter, it’s well above the 18.9% figures from March 2021.

According to APRA, the ASX 200 bank shares “need to have systems in place to limit growth in higher risk residential mortgage lending, such as loans at high debt-to-income multiples or high loan-to-valuation ratios”.

Byres continued:

In the current environment, with high household indebtedness and rising interest rates, it’s essential for banks to prudently and proactively manage risks in residential mortgage lending.

APRA expects lenders to closely monitor housing lending risks to ensure that aggregate portfolio risks remain within their risk appetite and that standards for new lending remain prudent.

With stricter lending standards, the ASX 200 bank shares’ lucrative home lending businesses could face some additional headwinds.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. 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.

More on Bank Shares

A man smiles as he holds bank notes in front of a laptop.
Bank Shares

ANZ share price on watch following equity raising update

ANZ has raised money to fund an acquisition...

Read more »

ASX 300 share investors in suits running a race on an athletics track
Bank Shares

Up 10%, why has the Westpac share price smashed other ASX banks this past month?

The Westpac share price has surged this month despite rocky Q3 earnings results.

Read more »

Confident male executive dressed in a dark blue suit leans against a doorway with his arms crossed in the corporate office
Bank Shares

The NAB share price has gained 5% since last week’s update. What’s next?

NAB shares are in focus as the big bank steadily climbs on the ASX.

Read more »

Two businesspeople in suits run, one chasing the other.
Bank Shares

Can ANZ’s latest acquisition help it catch up to the other ASX 200 bank shares?

How much of a difference will buying Suncorp’s bank make? We take a look.

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Bank Shares

Why is the CBA share price sliding today?

CBA shares are trading without rights on Wednesday.

Read more »

Woman on her laptop thinking to herself.
Bank Shares

Is the Bendigo Bank share price in the buy zone following Monday’s sell-off?

A broker gives its thoughts on the bank share's outlook following its post-earnings slump.

Read more »

A man in a suit smiles at the yellow piggy bank he holds in his hand.
Bank Shares

Is the Westpac share price a buy following the bank’s latest update?

Are Westpac shares a buy after its latest update?

Read more »

A man sitting at his dining table looks at his laptop and ponders the CSL balance sheet and the value of CSL shares today
Bank Shares

Is the CBA share price overvalued compared to other ASX 200 banks?

CommBank is the most exposed to any downturn in the Aussie housing market.

Read more »