Will our ultra-low interest rates hurt the ASX banks?
ASX banking shares have had a rough trot recently to be sure. Commonwealth Bank of Australia (ASX: CBA) is holding up the best, with a 22% drop in the last month. Although that's a nasty move, at least any CBA shareholders who bought in before July 2013 are still in the green.
Unfortunately, we can't say the same for National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ).
Anyone who has bought ANZ shares since 2011 would still be underwater on a share price basis. For NAB and Westpac, you're looking at lows not seen since the GFC in 2009. Of course, the banks' hefty dividends have helped keep things afloat. But these are still sobering statistics considering our banks still make up four of the largest six companies on the ASX.
So could things get worse from here? That banks have (in my opinion) been put through the washer over the last month (along with most ASX shares) mainly because of the economic damage that the outbreak of the coronavirus is likely to inflict on the global economy.
But another factor to consider is the Reserve Bank of Australia (RBA)'s move to slash interest rates to a new record low of 0.5% last week.
How do interest rates affect the ASX banks?
At a rudimentary level, banks make money by receiving deposits from Person A and lending said deposits to Person B. The bank will pay Person A an interest rate for 'lending' the bank money, while at the same time receiving a higher interest rate for lending the money to Person B. This difference is called the 'spread'.
When interest rates are at 0.5%, it's very difficult to offer depositors' an interest rate that's worth them lending money to the bank, while also offering competitive loan rates on mortgages and the like. It's therefore no coincidence that the ASX banks' share prices have been falling since the RBA first started cutting interest rates again last year – the spreads are getting squeezed in a big way.
And with the current economic climate, many commentators are expecting the RBA to cut interest rates once more before too long.
Foolish takeaway
So yes, our ultra-low interest rates are almost certainly going to have a huge impact on our ASX banks – and not in a good way. That, in turn, has the potential to threaten earnings and dividends. So I'm not too wild about any of the ASX banks' share prices right now as a result, even though they're at multi-year lows.
