What a day for Australian banking stocks – and potentially the biggest news is yet to come in the federal budget.
After banks took a thumping in Monday’s trade, Tuesday started with ANZ reporting a shock 24% fall in H1 profit and announcing it was cutting its interim dividend by 7%.
Then the RBA announced it was cutting the official cash rate at 2.30pm by 25 basis points, citing concerns about a low inflation outlook. The banks this afternoon moved to announce reductions in their home loan rates this afternoon, starting with the NAB announcing it was passing on the full 25 basis points to its mortgage customers. It was followed by Westpac and CBA. ANZ also cut, but only by 19 basis points.
Under normal circumstances this would not be a good news day for financial stocks, which conventionally rely on a healthy economic outlook and strong interest rates to grow business and get a return on loan assets.
But bank shares – especially those of the big four – rallied. The ASX financials index finished the day up 3%, the Commonwealth Bank and NAB were each up 3.7%, and Westpac was back up above $30 and up 2.3%.
Shares in ANZ, which this morning posted a fall in cash profit of 24% and missed expectations by over $700 million, finished up 5.5%.
The more cynical might say that the availability of even cheaper money pushed investors into automatic buying mode. And maybe there’s some of that at work – but the rally began from mid-morning and probably for a variety of reasons.
ANZ for one, in reducing its dividend, has signalled to the market that it is going to be more cautious about regular payouts to shareholders. Others may follow, signalling a potential shift in the banking industry towards longer-term strategic capital management and less focus on dividend pressure from shareholders.
Also, the big hits to the ANZ line were decidedly one-off charges, including a major change to how it handles project financing which should better allow for more the more nimble systems investment required in an increasingly competitive world. The RBA, too, noted in its statement that, inflation outlook aside, the economy is in good fettle. The rate cut should give it a further kick along. Or so the theory goes.
And then there’s the budget. Corporate Australia is expected to hear of plans for a significant reduction in the company tax rate in the coming years. And there are tax cuts coming for small businesses, as well as adjustments to income tax thresholds that should put more money back in the hands of workers.
Taking all of that into account, it’s a heady mix.
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