S&P/ASX 200 Index (ASX: XJO) bank shares initially charged higher after the Reserve Bank of Australia (RBA) announced its latest interest rate hike at 2:30pm AEST yesterday, with most of the big bank stocks outperforming the index.
As you're likely aware, the central bank lifted the official cash rate by another 0.50% yesterday. That marked the fourth month in a row of rate increases, bringing Australia's official cash rate to 1.85%.
Before the RBA moved to raise rates from the all-time lows of 0.1% in May, the bank had not tightened its monetary policies in more than 10 years. And according to RBA governor Philip Lowe, we can expect more tightening in the months ahead.
Here's how the ASX 200 bank shares responded.
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ASX 200 bank shares charge higher…at first
The RBA's rate hike decision hit the markets at 2:30pm AEST.
In the hour after the RBA's statement, the ASX 200 shot up 0.5%. The index finished the day up 0.4% from the time of the announcement. The benchmark index closed 0.32% lower on Wednesday.
As for the ASX 200 bank shares, the Commonwealth Bank of Australia (ASX: CBA) share price initially jumped 0.4% on the news and finished up a slender 0.04% in the 90 minutes following the RBA's report. The CBA share price closed 1.47% lower today.
Westpac Banking Corp (ASX: WBC) shares leapt 0.6% on the news and managed to hold those gains, closing 0.6% from the level they were trading at when the RBA news hit the wires. Westpac shares finished down 1.6% today.
National Australia Bank Ltd (ASX: NAB) followed a similar trend, first jumping 0.7% and then giving back some of those gains to close up 0.4% from the time of the announcement. NAB shares ended Wednesday's session down 0.58%.
As for Australia and New Zealand Banking Group Ltd (ASX: ANZ), the ASX 200 bank gained 0.6% on the news of the RBA rate hike and closed up 0.2% from the time of that news. ANZ finished the day down 0.44%.
Headwinds and tailwinds from rising rates
As interest rates rise from historic lows, this presents opportunities and threats for the ASX 200 bank shares.
The biggest threat stems from a potential steep fall in the banks' lucrative mortgage lending sector, as well as the chance that if rates rise steeply and quickly the banks could see a sizeable increase in bad debts.
The biggest opportunity lies in the banks' abilities to increase their net interest margins (NIM) and boost profitability on their loans.
Out of the ASX 200 bank shares, JP Morgan reports that CBA is "most leveraged to a rising cash rate", enabling it to squeeze the most out of increased NIM as rates go higher.
However, the broker also notes that CBA is trading at a significantly higher price to earnings (P/E) ratio than its peers.
