The Commonwealth Bank of Australia (ASX: CBA) share price lunged further south today, ending the day 2.59% in the red at $94.95.
Today’s fall brings the bank’s losses this week to almost 10%, as investors seek to price in troubling headlines on Australia’s mortgage market.
Here we take a look at what’s happening.
What’s clamping the CBA share price?
The flavours of surging inflation and rising interest rates make for an ill-tasting economic dish the market looks set to endure next few periods.
Consequently, the current chatter around ASX banks is centred around these factors.
Credit and ratings agency Moody’s Investors Service reckons there are impeding risks on the horizon for Australia’s mortgage market.
A rise in interest rates is generally accepted as a net positive for banks, seeing as it increases net interest income (NII) and widens net interest margins (NIMs), two important factors of income on a bank’s P&L statement.
However, context is equally as important. The fact is, as Moody’s agrees, Aussie banks are heavily tied to the mortgage market, meaning the risk of loan defaults threatens profitability in the sector.
“The risk of mortgage delinquencies will be highest for borrowers with high loan balances and where amounts are close to buyers’ maximum borrowing capacities,” Moody’s said.
“However, we expect delinquency rates will only increase moderately overall this year because interest rates, while rising, are still low.”
This could change if and when the Reserve Bank of Australia (RBA) continues on its path of rate hikes into FY23 and FY24. On Tuesday, the RBA hiked the cash rate by 50 basis points to its highest level in years.
An upward trajectory in rates also marks down the value of housing in Australia, creating a two-pronged threat for banks. One is that borrowers are less likely to sell their house at the price they bought it. Second, the value of mortgage collateral (property) is also lower, hurting bank loan-to-value (LTV) ratios and other metrics.
Going forward, there could also be an increase in the provision for bad debts on banks’ income statements, thereby hurting earnings.
These points appear to have been accepted by the market, resulting in a sell-off throughout the entire sector.
In the last 12 months, the CBA share price has wormed more than 6% into the red and is trading down more than 6% this year to date.
The post The CBA share price has sunk a brutal 10% so far this week. What gives? appeared first on The Motley Fool Australia.
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Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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