Date of Award

1992

Document Type

Thesis

Publisher

Edith Cowan University

Degree Name

Bachelor of Business (Honours)

Faculty

Faculty of Business

First Supervisor

Ray Boffey

Abstract

This paper examines the relationship bank share returns have with interest rate changes. Specifically, what is the systematic interest rate risk of Australian bank share returns. The reasons why bank shares and interest rates possibly have a relationship with interest rates are numerous, interrelated and complicated. Shares and interest rates generally have a relationship because of the comparison made between interest bearing securities and dividend paying shares. However, the relationship is compounded with banks, because of their exposure to interest rate risk. This paper involves two separate analyses. The firp.t part involves attempting to measure a bank share's interest rate sensitivity. This will be achieved using a two index market model, which will give a measure of a banks systematic interest rate risk. The second part attempts to discover the reasons for this relationships existence. This involves a survey of banking analysts. The two index market model was applied to the ANZ Banking Group (ANZ); National Australia Bank (NAB), and; Westpac Banking Corporation (WBC). In addition the Australian Bank Accumulation Index (Bank Index) was used to gain an indication of the general relationship between bank shares and interest rates. The results indicate that the relationship between interest rate changes and a shares return is strongest and inverse for NAB. At various times WBC and the Bank Index showed a significant relationship. However, this was unstable, and varied in both strength and direction over time. At no time was a relationship found for the ANZ. The survey gave reasons for these results. A general relationship was thought to exist mainly because of the comparison made by investors between interest bearing securities and dividend paying shares. The analysts did not believe the operating aspects of banks played a major role in determining this relationship. With rega1d to the differences bank to bank, NAB has a stronger relationship because it is not hampered to the same extent as ANZ and WBC are by poor asset quality. Therefore, interest rate changes are allowed to play a more important role in determining the return on NAB shares. Whereas, for ANZ and WBC, their shares return are affected by other factors which are considered more important than interest rate changes.

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