With the RBA widely expected to cut interest rates today, will banks like Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB) be hurt, or could they benefit?
Will the RBA Cut Rates?
Expectations have been building that the RBA will cut the cash rate today, likely by 25 basis points or 0.25%. While there is no guarantee this will happen, it has been looking increasingly likely over the last month, with some commentators going so far as to say that rates could be 0.5% by next year.
While we don’t know for sure what will happen today, let’s assume the RBA cuts the cash rate and consider what happens next for the banks…
The idea behind cutting rates is to stimulate borrowing and spending. If rates are cut, and banks pass the cuts on to consumers, it could potentially stimulate credit growth. This would see the banks’ balance sheets grow and would be a positive for them over time.
Lower interest rates could also potentially decrease bad debt expenses for the banks. New loans would be issued at lower, more affordable rates, while consumers on existing variable rate loans could see their interest payments cut. Anything that makes the loan more affordable for the consumer will lower the chance of them defaulting on the debt.
The main negative point for the banks would be lower net interest margins (NIM). The NIM is the difference between the rate at which the bank borrows and the rate at which it lends to consumers. The banks are being pressured to pass on any potential rate cuts, even by Treasurer Josh Frydenberg according to the AFR. This might lower the NIM and, as a result, banks would have to rely on higher lending to cover the difference.
If the NIM falls and borrowing does not increase, perhaps because Australian households are already at record debt levels, the banks may see their interest income fall.
So, Will the Banks Go Up or Down Today?
No one can predict the future, and obviously, there is an argument for either case. It is also possible that a rate cut has already been priced into the bank share prices because investors have been expecting it for some time. In other words, there’s a chance the banks won’t move that much today.
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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.