Bank shares drop as rate rise sparks bad debt fears

Banking giants’ share prices have dropped sharply after the Reserve Bank surprised investors with a 0.5 percentage point rise in official interest rates and warned of more increases to come, sparking fears that more borrowers could face financial stress.

Worries that higher interest rates would slow the economy weighed on the sharemarket on Tuesday, with the ASX 200 falling more deeply into the red after the RBA’s aggressive move, closing 1.5 per cent lower.

None of the major banks had announced how they would be changing mortgage rates in response to the RBA move.Credit:Karl Hilzinger

National Australia Bank shares fell 3.3 per cent, Commonwealth Bank dropped 2.6 per cent, Westpac fell 2.1 per cent and ANZ fell 1.5 per cent, while companies exposed to the housing market also dropped, with REA Group falling 4.2 per cent and Domain falling 2.9 per cent.

The Australian dollar jumped in response to the RBA’s move, rising from US71.85¢ to as high as US72.49¢, as economists predicted the RBA would raise rates by another 0.5 percentage points next month.

At 5.45pm, none of the major banks had announced how they would be changing mortgage rates in response to the RBA move.

Amid predictions the RBA could now lift rates more quickly than previously thought, analysts said the fall in bank shares reflected investor worries about rising bad debts and a weaker housing market.

Will Curtayne, portfolio manager at Milford Asset Management, said investors had already factored in the benefits banks are likely to make from rising rates through wider net interest margins, but now the market’s focus had turned to the risk of bad debts.

“Rate rises are initially positive because margins go up. But eventually, rate rises become negative as fears of recession dominate,” Curtayne said.

“The housing market is already coming off. The fear is that this accelerates the downturn in the housing market and brings forward bad debts.”

RateCity said monthly repayments on an average new loan in NSW would lift by $208 as a result of the change, while repayments on an average new loan in Victoria would increase by $169 a month.

Jun Bei Liu, portfolio manager at Tribeca Investment Partners, said the drop in bank shares was a knee-jerk reaction that centred on the risk of rising defaults, which have been at low levels. “Investors are just a little bit concerned about the prospects for mortgages, as well as economic activity, given the sharp rate rise,” Liu said.

Morningstar analyst Nathan Zaia said investors were probably concerned about the possibility the RBA would raise rates more quickly to rein in inflation, squeezing some borrowers in the process. “It does not give people as much time to adjust to these higher interest payments,” he said.

Zaia said he was not expecting a sharp increase in bad debts, which have been at unusually low levels after the RBA slashed the cash rate to a record low during the pandemic. “Are they going to normalise? Yes, but you’re still talking about a pretty low rate environment,” Zaia said.

Following the surprise move, Commonwealth Bank economists lifted their forecast for the cash rate this year and predicted a 0.5 percentage point cash rate increase in July, followed by a 0.25 percentage point move in August. CBA economists also said they would cut their forecasts for economic growth for 2022 and 2023.

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