Home / News / What is the impact of interest rates hikes on the big four banks?

If there was one word to summarise the relationship between the big four banks and interest rates, it would be volatile. In March, the banks rallied after the Reserve Bank of Australia shifted its dovish rhetoric and signalled imminent rate rises to combat inflation. Now with the RBA acting on those increases by most recently passing a 50 basis point increase, big four shares are tumbling over themselves.

If there was one word to summarise the relationship between the big four banks and interest rates, it would be volatile. In March, the banks rallied after the Reserve Bank of Australia (RBA) shifted its dovish rhetoric and signalled imminent rate rises to combat inflation. Now with the RBA acting on those increases by most recently passing a 50 basis point increase, big four shares are tumbling over themselves. In June alone the share price of:

• Commonwealth Bank of Australia (ASX: CBA) fell 10.36%
• Westpac Banking Corp (ASX: WBC) fell 11.24%
• Australia and New Zealand Banking GrpLtd (ASX: ANZ) fell 5.93%
• National Australia Bank Ltd (ASX: NAB) fell 9.19%

The basic logic is that increasing interest rates is a positive for banks. The increase is passed on to end customers like households and businesses while retaining some of that margin by only partially passing on the increase to depositors. As a result, the margin banks earn, also known as the net interest margin (NIM) or spread increases. Given that 80% of the big four revenue is derived from NIM, this is a major driver of earnings.

But the theory above fails to account for the second-order impact of rates rises. By definition, the central bank is trying to suppress demand by increasing the cost of debt. The housing market has already taken the cue, with prices heading south in capital cities. Meanwhile, households and businesses are being hit by rising costs as inflation soared to 5.1%. Per CBA, 36% of its loans are less than one month ahead of their repayments. Arrears will begin to rise, with the big four needing to reserve more provisions as customers fall behind. A slowing economy will dent lending confidence, meaning lower new originations. Subsequently, the freekick big banks receive on their NIM is likely to be eroded by a deteriorating economic backdrop. And that’s before accounting for the fierce competition amongst one another. Macquarie Group Ltd (ASX: MQG) this week launched a transaction account with a 1.5% savings rate, offsetting near term NIM reprieve for the big four.

It should be noted by global standards, Australian banks are relatively resilient. APRA’s lending standards require the big four to hold at least 10.5% in regulatory capital, shielding shareholders and more broadly the Australian economy from unforeseen downturns. But investors should tread with caution when assuming interest rates will perpetually benefit the bottom line of the big four.

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