Financials sector is dragging down the ASX, with the big four under pressure. (Bianca De Marchi/AAP PHOTOS)
The ASX dipped into the red as major bank stocks have been under pressure, dragging on the broader market as investors filter through macroeconomic and sector-specific risks. On Tuesday, financials were among the weakest sectors on the ASX, contributing to an overall market slide despite strength in materials stocks like the mining sector.
Why major bank stocks are struggling?
Valuations stretched across ASX bank stocks
The big four bank stocks came into this period trading at elevated multiples relative to their historical averages, particularly CommBank trading with a price-to-book ratio at a decade high. With earnings growth moderating, investors have become less willing to pay premium valuations, hence profit-taking across the sector.
Net interest margins facing pressure
After benefiting from decade-high interest rates, banks are now seeing margin pressures as competition for deposits intensifies and funding costs rise. With loan repricing largely finished, prospects for margin expansion in the near future looks limited, reducing a key earnings tailwind.
Earnings growth expectations moderating
Recent updates are showing stable but unspectacular profit growth, with limited upside surprises. Slower credit growth and rising operating costs have reinforced expectations that bank earnings are entering a flatter phase of growth.
Rate outlook creating uncertainty
With inflation numbers coming out today Australian investors are watching CPI and RBA decisions. Fluctuating expectations around the path of interest rates have added volatility and uncertainty to bank stocks. Sticky inflation or a firmer Australian dollar can put pressure on growth sectors like financials, as bond markets price in higher real yields, which tends to dampen bank multiples.
While rate cuts could support loan growth, they also risk compressing margins, leaving banks caught between opposing forces.
Sector-wide rotation weighing on banks
The broad weakness has across the major banks point to sector rotation as opposed to firm-specific issues. With few near-term catalysts and elevated valuations, investors have started rotating capital toward materials and stock-specific opportunities, leaving financials lagging despite still strong and solid balance sheets and dividends.
Disclaimer
This investment recommendation is prepared for informational and educational purposes only and does not constitute financial advice or a recommendation to buy or sell any security. Past performance is not indicative of future results. Investors should conduct their own due diligence or seek professional advice before making investment decisions.