Why are banks selling off as rates rise? Morningstar explains

-- | 15/06/2022

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Nathan Zaia: We still think bank margins will improve. As cash rates have increased, they've got a large part of their funding from transaction accounts, which do tend to be pretty sticky. So, they will see some margin expansion. I think the thing that the market is focusing on, okay, what does that mean for bad debts. And we have always thought bad debts will go up, credit growth will slow, and it's been – it was 8% in 2021, still running at about 5%, 6% annualized. I think the question is, with rates increasing, how does that outlook change.

And look, the starting point, I think, for households and the banks is really good. So, I think that gives us some confidence that we're not going to see this massive spike in bad debts. 70% of borrowers are ahead on their monthly repayments. We've got 40% 12 months ahead. The average loan to value ratio is about 40%. So, it's a good starting point. But I think the fear has been now, well, rates are going to rise quickly. That gives people less time to adjust their living expenses, less time to get those wage increases. So, there is a slight elevation to that risk, and I think those fears about a global economic recession, I think, that's more than priced into the market now. If we assume a little bit higher bad debt, it doesn't have the same impact on these bank valuations that the market is implying.

This report appeared on www.morningstar.com.au 2022 Morningstar Australasia Pty Limited

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