The late surge in the share price of Westpac Banking Corp (ASX: WBC) dragged the banking sector higher yesterday after Westpac did the unthinkable – it took on Canberra and lifted mortgage rates!
This is a bold political move as it is the first big bank to increase rates to the ire of politicians (and its mortgage customers, no doubt) with our new Treasurer Josh Frydenberg issuing a "please explain".
But that won't put off shareholders. Westpac was the best performing big bank stock as its shares jumped 2.7% to $28.88 on Wednesday, while shares in the other three big banks also made good gains.
Is it time for bargain hunters to jump back into the beaten down sector?
Before I get into that, it's actually logical for Westpac to be the first to jump off the boat and into the shark infested waters. The big banks have been resisting lifting rates for months as the sector is being put through the wringer by the Royal Commission, which has triggered a big de-rating in the share prices of the big banks plus AMP Limited (ASX: AMP).
But Westpac probably knew it couldn't count on Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB) to go first, as both are facing the prospect of criminal prosecution.
Australia and New Zealand Banking Group (ASX: ANZ) is also unlikely to move now as it has stopped issuing quarterly earnings reports. The banks will need to justify the rate lift before any of them can jump, and Westpac did that this month when it reported a bigger-than-expected 11 basis point drop in its net interest margin to 2.06% due to higher wholesale funding costs for the sector.
Also, Westpac has the most to gain from the move as it has a larger proportion of borrowers on interest-only loans that are about to be converted into principle-plus-interest loans. The latter is a lower margin product, and the squeeze would be more severe for the bank.
Make no mistake, the other three big banks will follow Westpac's move very shortly as Westpac has taken the heat for the controversial move.
That's a rare piece of good news for embattled bank investors who have watched these blue-chips underperform the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index for over a year.
Their ability to raise rates independent of the Reserve Bank of Australia will remove one of the key issues weighing on their share prices, but I don't believe the share price run can be sustained.
If anything, I would sell into the rally as I suspect a better buying opportunity will present itself in late October, ahead of their full year profit results (except for Commonwealth Bank) when we are closer to getting paid a dividend and we have more clarity on what the payout will be like going forward.
This also gives me a chance to see if the drop in house prices is still accelerating or easing. I would only think about buying when I become more confident that the pace of the decline is slowing in what could likely be a two-year down-cycle for the property market.
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