Australia’s big four banks are anticipated to face increased pressure following the Reserve Bank of Australia’s (RBA) recent interest rate hike. Morgan Stanley has issued a warning that the earnings of these major lenders could be negatively impacted by as much as 11 per cent. Richard Wiles, a bank analyst at Morgan Stanley, stated that the RBA’s 25-basis-point increase to 4.1 per cent could significantly alter operating conditions for Commonwealth Bank, National Australia Bank, ANZ, and Westpac.
Wiles highlighted that rising borrowing costs and a potential economic slowdown could trigger a de-rating of the banks’ shares. With the market anticipating further rate increases, Morgan Stanley forecasts a slowdown in annual GDP growth. RBA governor Michele Bullock indicated that further rate increases were possible, despite the risk of triggering an economic downturn. An economic slowdown would also likely lead to slower loan growth, impacting the banks’ performance.
In a worst-case scenario, Morgan Stanley estimates significant earnings downgrades for each of the big four banks. Wiles cautioned that shares of CBA could fall by over 40 per cent, Westpac by 36 per cent, NAB by 31 per cent and ANZ by 21 per cent in this scenario. A key factor contributing to this risk is the high price-to-earnings multiples at which these shares are currently trading. According to Wiles, historically, bank price-to-earnings multiples tend to decrease when the RBA raises interest rates.
Money markets suggest a significant probability of another rate hike at the RBA’s next meeting, with expectations of two more rate rises by Christmas, potentially pushing the cash rate to its highest level since November 2011. UBS has also adjusted its RBA forecast, now anticipating a rate increase in May. On Wednesday, ANZ shares experienced a decline after Goldman Sachs revised its outlook to ‘neutral’, while CBA, Westpac, and NAB shares traded flat.
