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The Australian banking sector made a notable recovery on Tuesday, with major lenders stabilizing after experiencing one of the worst market sell-offs since the pandemic. This decline had pushed ASX bank stocks into correction territory within just two trading sessions.
Market Recovery
Commonwealth Bank of Australia (ASX:CBA) saw a 1.7% rebound during Tuesday’s session. Other major banks also showed strength. Despite this, the major lenders remain significantly lower than their recent peaks. National Australia Bank Ltd (ASX:NAB) is down nearly 10% since last Thursday’s high, CBA is 8% lower, Westpac Banking Corp (ASX:WBC) is 7% down, and Australia and New Zealand Banking Group Ltd (ASX:ANZ) has dropped 6%. On Monday, CBA had fallen by 5.7%.
Valuation Concerns
Analysts have continued to express concerns about the valuations of these major banks. Jefferies analyst Matt Wilson stated that despite the recent decline, CBA, NAB, and Westpac still appear expensive. He noted that “the margin of safety in bank share prices is non-existent,” and potential triggers for further declines could include economic changes, risk factors, or market corrections.
In contrast, bank stocks in other markets fared even worse. Japan’s Nikkei 225 experienced a 12.4% drop on Monday, its largest single-day decline since the 1987 market crash. Japanese banks were notably affected, with Mizuho Financial Group (TYO: 8411) down 14.2% and Shizuoka Financial Group (TYO: 8355) sliding 12.5%. However, Japanese shares showed some recovery on Tuesday.
Focus on Interest Rates and Earnings
The Reserve Bank of Australia (RBA) is expected to maintain the cash rate on hold during its announcement today, given that inflation remains above the target range. With banks preparing to report earnings over the next two weeks, the impact of the 13 rate hikes since May 2022 will be closely watched.
Commonwealth Bank’s full-year results are set to be released next Wednesday. Analysts anticipate a weaker fourth quarter for CBA, with an expected expansion in net interest margins (NIM) potentially offset by an increase in credit losses. UBS analyst John Storey expects a credit loss ratio of 0.11% in the second half, with no new share buybacks anticipated.
Morgan Stanley analyst Richard Wiles noted that margins and loan loss impairments will be key areas of focus when NAB and Westpac report their quarterly results on August 16 and August 19, respectively. NAB is expected to show a 1% increase in third-quarter cash profit, with a $120 million impairment charge. Westpac’s profit may decline by 1%, with revenue and costs both expected to rise by 1% and a loan loss charge of $170 million.
Outlook for Australian Banks
The International Monetary Fund (IMF) has noted that Australian banks are well-positioned to handle potential challenges due to high capital levels and resilient borrowers. However, the IMF cautioned about “pockets of vulnerability,” particularly among lower-income households with higher debt levels.
The average new owner-occupier mortgage in Australia has reached a record high of $636,597, according to RateCity. Over the past year, this figure has increased by $56,357, translating to an average rise of $154 per day, driven by rising property prices in major capital cities.
