Westpac and most other ASX-listed bank stocks were hammered on Wednesday amid speculation that international hedge funds had taken bets against their earnings prospects as inflation takes a grip on the Australian economy.
A local fund manager told Banking Day on condition of anonymity that several hedge funds had opened short positions on Australian banks in the belief that household borrowers would come under financial stress in the face of sustained price inflation and rising interest rates.
Bank stocks were the standout underperformers on the ASX on Wednesday, which saw all other industry sectors post gains.
While the benchmark S&P/ASX 200 index rose 0.36 per cent, the financials index slumped by almost three per cent.
Westpac and Bendigo Bank were the hardest hit stocks in the sector, but all other banks – except for the diversified Suncorp - lost significant ground.
Trading in Westpac scrip was frenetic throughout the day, with almost 18 million shares changing hands - almost three times the average daily turnover.
The bank’s share price closed down A$1.43 or 6.1 per cent to $21.98.
Bendigo scrip fared a tad worse, closing down 76 cents or 7.2 per cent to $9.81.
The turnover in Bendigo shares was more than double the daily average for the past 12 months.
Trading in Commonwealth Bank scrip was also brisk at more than double the daily average. CBA’s stock price closed down 4 per cent, along with Bank of Queensland and NAB.
Sydney-based hedge fund manager James Falkiner – a former leading Australian bank analyst in the 1990s – said offshore hedge funds were probably taking preliminary positions that the debt-laden household sector might struggle to service mortgages in the current economic environment.
“We know that thirty per cent of Australian mortgage loans have negligible prepayment buffers,” he said.
“The regulators would have to be most concerned about borrowers swimming close to the sharks.
“What I mean by that is when you go to Bondi it’s wise to make sure there is someone between you and the sharks.
“The moral is that too many borrowers are not conservatively geared.”
Recent research reports issued by bank analysts have painted an increasingly mixed picture on the earnings profiles of Australian banks despite the expectation of official rate rises this year.
GoldmanSachs chief analyst Andrew Lyons highlighted the emerging recovery in interest margins across most of the sector this year but noted that this was not yet being reflected in operating profits before provisions.
While Lyons suspects that net interest margins at the major banks could recover by as much as 50 basis points in the next three years, he was also mindful of the cost pressures weighing on the banks.
“With inflation pressures only just starting to accelerate in Australia, and all banks highlighting a need for elevated investment spend, we continue to think costs will be key determinant of relative sector performance,” he wrote in a report published in last week.
Lyons also believes that the household sector is “well positioned” to withstand a series of official rate rises.
“The effect on housing losses is likely to be relatively muted,” he observed.
However, some hedge funds are now betting that the potential downside of inflation and rising rates for banks - higher operating costs and bad loans and tapering credit demand - will outweigh the expected retrieval of margins.