Is this pop the sound of the bank share bubble bursting?

Could the share price bank bubble have finally burst? It may be premature to make this call or even posit the question, but over the past week, there’s been an audible sound of air coming out as bank shares across the board have retreated from their highs.

Making a call that bank shares will fall is a risky business. They are much loved by retail investors and must-haves for many fund managers because they make up such a large part of the Australian sharemarket index. As a result, they have defied gravity for a year.

Bank share prices are falling across the board.Credit: Dominic Lorrimer

Curiously, it was last week’s release of Commonwealth Bank’s half-year profit that triggered the share price wobble across the sector.

The CBA result demonstrated why it is the leader of the pack: its loan growth was enviable, it’s managing its exposures to arrears and troubled loans well, and it had the confidence to increase its dividend.

But despite the fawning of investors and analysts, the bank grew profit by just 2 per cent – not an outcome that would shoot any lights out.

Since then, we have seen how the rest of the sector is travelling. Sure, it illustrates the superiority of the CBA, but also the ruggedness of the landscape for banks.

As each underwhelming bank result hits the market, it infects the share prices of the others.

It feels like the market has finally woken up to the fact that bank share prices have been unfathomably overvalued for a year.

And it isn’t as if investors weren’t told. Bank analysts have been screeching about overpriced bank shares, and noting how the Commonwealth Bank is valued like a US tech giant with enormous growth upside, rather than an Australian bank during a period of sluggish economic growth.

Even Tuesday’s decision by the Reserve Bank to cut interest rates, which should act as a stimulant to economic growth and consumer confidence, didn’t act as a kicker for bank shares.

(Although bank profits are generally helped by rising interest rates, they are also assisted by economic growth.)

As each underwhelming bank result hits the market, it infects the share prices of the others.

The latest was National Australia Bank, whose cash earnings dived 16.9 per cent in the December quarter to $1.8 billion amid an economic slowdown, reflected in rising mortgage arrears, which triggered a $193 million impairment charge for bad loans.

And even though NAB’s performance wasn’t wildly shy of expectations, its share price was immediately thumped by 7.5 per cent. Short of a catastrophic event like COVID-19, big banks don’t generally suffer one-day falls of this magnitude.

But NAB appears to have spooked investors with reporting of a bad and doubtful debts charge that was slightly higher than those of its peers. However, this was not too concerning, and certainly not enough to justify the share price reaction.

Westpac reported $1.7 billion in net profit for the three months to the end of December earlier this week, down 9 per cent compared with the quarterly average in the preceding September and June quarters.

Its share price also suffered after its latest update, and in all, Westpac shares are down 7 per cent over the past five trading days.

It was the relative minnow Bendigo and Adelaide Bank whose shares crash-landed harder than the banking big boys.

Bendigo and Adelaide Bank shares plunged 15 per cent on Monday after it reported a 6 basis points fall in margins, which hit its earnings for the first half of the year.

Cash earnings for the six months to December 31 fell to $265.2 million, down 1.1 per cent on the prior corresponding period and 10 per cent below the June half.

Meanwhile, ANZ, which doesn’t report quarterly earnings, has experienced a 3.85 per cent decline in its share price as it has also been infected by the negative bank sentiment.

Could it be that the bank share price party is over? The analysts are certainly waiting for their ‘I told you so’ moment. They’ve been waiting for a while.

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