A rough day on the market was turned around this afternoon as many S&P/ASX 200 Index (ASX: XJO) bank shares bounced into the green. Their U-turn came as the Reserve Bank of Australia (RBA) hiked interest rates for a third consecutive month.
Here’s how the ASX 200’s ‘big four’ banks are performing at the time of writing:
- Commonwealth Bank of Australia Ltd (ASX: CBA) – up 0.42%
- Westpac Banking Corp (ASX: WBC) – up 0.56%
- National Australia Bank Ltd (ASX: NAB) – up 0.07%
- Australia New Zealand Banking Group Ltd (ASX: ANZ) – down 0.02%
For context, the ASX 200 is currently up 0.52% while the S&P/ASX 200 Financials Index (ASX: XFJ) has lifted 0.34%.
What’s going on with ASX 200 banks on Tuesday?
ASX 200 banks are trading on Tuesday amid a third rate hike in as many months. The RBA increased the official cash rate by 0.5% to 1.35% – broadly in line with market expectations.
Rising rates bring positives for banks. It allows them to change their variable loan rates, generally increasing their net interest margins (NIM).
Though, it also increases the likelihood of mortgage foreclosures. That’s particularly worrying as 23.1% of new residential mortgage loans funded during the March quarter were found to have debt-to-income ratios of at least six times.
Passing on the last three rate hikes to borrowers would see those holding a $500,000 mortgage with 25 years remaining paying $333 more in repayments each month, reports RateCity.
On top of that, rising rates can negatively impact housing prices, therefore lowering the value of some banks’ loan books.
It’s also worth noting that other ASX 200 banks are outperforming right now.