How the Coronavirus is expected to impact Australia's big four banks

Last week the market was pricing in just an 18% chance of a 25 basis point cut from the RBA this Tuesday.

By mid-afternoon today that chance had skyrocketed to 120%, according to Westpac analysts.

The catalyst behind this dramatic change?

The Coronavirus.

As IG’s Market Analyst, Kyle Rodda, wrote this morning, the markets are leaning strongly towards an interest rate cut, ‘In response to the economic devastation expected to be brought about by the coronavirus.’

UBS analysts echoed Mr Rodda’s point, saying:

‘With the rapidly changing environment and the continued outbreak of COVID-19 the market is now fully pricing in a 25bp cut at tomorrow's RBA meeting.’

Some are now even calling a 50 basis point cut during tomorrow’s meeting.

Adding one final layer to these predictions, UBS further added that ‘the market is now pricing in some probability of QE.’

ANZ, CBA, Westpac and NAB share prices: rate cut chances climb

Though Australia’s big four banks have shrugged off some of the market drama in the last month; they, like the rest of the market couldn’t avoid last week’s brutal sell-off.

In the last five sessions: ANZ dropped 7.6%, CBA sank 7%, Westpac slumped 7% and NAB slid 7.48%.

And now, with the market fully pricing in a rate cut at tomorrow’s RBA meeting, UBS has placed all of the big four bank’s ratings and price targets ‘under review.’

Besides a perspective change though, UBS notes that a rate cut would place additional pressure on the big four’s net interest margins (NIMs).

On that front, UBS posits that ‘given the emergency nature of any rate cuts we believe the banks will be under pressure to pass through the vast majority of the cuts to borrowers […] and accelerate the effective date (we see no reason these cuts cannot be passed through within 1-2 weeks).’

Besides that, and positively at least for borrowers, the investment bank unsurprisingly argues that it expects the housing market would respond positively to any rate cuts.

Ultimately, beyond a hit to margins, UBS remains sceptical of the banks from a valuation perspective, ‘noting that absolute valuations remain elevated (1.6x Book) and banks are highly leveraged to interest rates and economic activity.’

UBS currently rates CBA a Sell, ANZ Neutral, NAB a Sell and Westpac Neutral.

Where do you stand: are the banks currently under or overvalued? You can trade any of the big four – both LONG and SHORT – through IG’s world-class trading platform now.

To buy (long) or sell (short) the Commonwealth Bank with CFDs, for example, follow these easy steps:

• Create an IG Trading Account or log in to your existing account
• Enter ‘CBA’ or 'Commonwealth Bank of Australia' in the search bar and select it
• Choose your position size
• Click on ‘buy’ or ‘sell’ in the deal ticket
• Confirm the trade