Why Westpac Shares Slumped Today

What Happened to the Westpac Share Price?

Shares of Westpac Banking Corporation Ltd [ASX:WBC] fell more than 2.4% today as bank shares continue to weaken across the world.

Why Did WBC Shares Fall?

Even though interest rates for government bonds have been falling, the cost for corporate bonds has risen.

And as Bloomberg reports:

Australia’s four biggest banks had more than A$500 billion of long-term borrowings at Sept. 30, according to the Australian Prudential Regulatory Authority, three times more than what they owed a decade ago. Another A$227 billion is payable by the end of this year’s third quarter.

This creates problems for the banks. Some of the biggest beneficiaries of the cash flow from the mining boom were Aussie banks. But profits slumping, that means there are fewer dollars pouring into the banking system.

That’s not good news for banks as they only have two ways to accumulate funds — they can either attract deposits or borrow by issuing bonds. If interest rates on bonds rise further, that increases the cost of funding.

What Now for Westpac Banking?

The major Aussie banks have taken a beating in recent months. And this week, Commonwealth Bank of Australia [ASX:CBA] announced that it wouldn’t increase its interim dividend.

That’s more evidence to suggest that the banks are keen to retain as much cash on their books as possible, especially if the Aussie housing market starts to turn south too.

In short, it’s a worrying time for the banks and for bank investors.

Cheers,

Kris Sayce,

Publisher, Money Morning

From the Port Phillip Publishing Library

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