Australian banks shares slumped this morning, following the Turnbull government’s unexpected announcement of a Royal Commission into the financial sector.

Commonwealth Bank led all financial stocks lower at the open, falling by more than 2% as each of the big four banks lost at least 1% in value.

But since the early falls, bank stocks have rallied to varying degrees as the market digests the fallout from the announcement.

However, investors have shunned CBA as it remains almost 2% lower for the session.

The announcement of a Royal Commission is another blow to CBA in a rough year for the bank, as it deals with a money laundering scandal in the Federal Court which saw top executives forego their annual bonus.

Westpac and NAB are now back into positive territory, while the regional players are leading gains in the sector.

Gains have been led by Bendigo and Adelaide Bank, which a short time ago was up by 1.4% while the Bank of Queensland had gained 0.8%.

ANZ has staged a slight rally but is lagging most of the other banks, down by around 0.6%.

UBS banking analysts Jon Mott and Rachel Bentvelzen said today’s announcement leaves the big banks “battered and bruised”, with an uncertain outlook ahead.

“We believe there is a dislike for banking institutions in the community and a perception they are over-earning,” the pair said.

“While a Royal Commission may address some of these concerns, the banks still face headwinds if there is a change in Federal Government given the Labor Party’s stated policies including: limiting negative gearing and reducing capital gains tax relief.”

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