Australian Banks Take the Cut

Despite a recovery in Australian house prices, which supports credit growth and low bad debts, the Reserve Bank of Australia, or RBA, cut the cash rate 25 basis points in recognition of economic risks from the global coronavirus outbreak. The major banks will pass on the cut in full. This is great for borrowers but puts net interest margins, or NIMs, under pressure. We lower our valuations by 2.5% to 5%, with lower near-term earnings driven by margin compression.