When interest rates go up, the banks make more money. But what happens when they go very high, very quickly?
When it comes to Australia’s major banks, the one thing analysts agree on is that rising interest rates are both good and bad. Where they’re divided is whether the positives outweigh the negatives., but they can also be too much of a good thing,” wrote fund managers at Blackmore in July when they decided to sell out of their shares in the Commonwealth Bank.
They cite two inconsistencies with a bearish call on bank asset quality. The first is that unemployment has never been better and so long as households have income they can service their loans. They also say the banks can protect their margins because they price loans for credit risk, so they can respond to a deteriorating environment if they have to.But as Barrenjoey’s economics and banking team point out, the issue is that credit growth could grind to a halt.
That competition is only set to intensify as about $500 billion of fixed rate home loans and a further $250 billion of split fixed and variable rate loans come due from next year, and are up for refinancing.the banks are benefiting from rising interest rates. That, they say, is “not cheap, especially in an environment where attention is focused on the downside in the economic outlook”.On a price-to-book measure, the average multiple of 1.4 times is lower than the long-term average of 1.8 times, but it’s worth noting that returns on equity for the banks are weaker than in the past.
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