What’s the outlook for ASX 200 bank shares amid rising interest rates?

Macquarie profit results asx banks represented by banker imagining rising profitsMacquarie profit results asx banks represented by banker imagining rising profits

Bank shares on the S&P/ASX 200 Index (ASX: XJO) delivered a decent set of profit results this month, but investors shouldn’t bank on more good times ahead, according to experts.

The sombre outlook comes as the big four ASX banks delivered a 5.1% increase in operating cash profit to $14.4 billion, according to KPMG’s analysis that was reported in The Australian.

ASX 200 bank shares deliver earnings bounce

This should be great news for the Commonwealth Bank of Australia (ASX: CBA) share price, Westpac Banking Corp (ASX: WBC) share price, National Australia Bank Ltd (ASX: NAB) share price and Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price.

After all, their profit growth puts them at just 0.4% below their pre-COVID-19 earnings. The growth in their latest half-year results is a function of continued strong demand for both residential and business loans.

The value of mortgages improved 2.5% to $1,812 billion, although business lending growth is the highlight as that expanded 4.8% to $1,077 billion, reported The Australian.

Why the good times for banks are under threat

This isn’t the time for investors in ASX 200 bank shares to get complacent though. It’s like the fine print you see in financial services ads: past performance shouldn’t be used as a guide for future performance.

That’s the verdict by analysts quoted in the article. KPMG’s head of banking Steve Jackson warned, “with uncertainty ahead, it will be interesting to see how they maintain their current momentum’’.

Cost savings lever is harder to pull

Further, ASX 200 bank shares have limited ability to leverage on cost savings, according to KPMG and EY. Cost-cutting is one of the key features of Westpac’s bullish profit results released yesterday.

This is because bank margins will continue to be squeezed by the jump in inflation and intense competition from non-bank lenders.

EY’s banking and capital markets leader, Tim Dring, believes that margin headwinds will continue into the second half of the year. But the outlook is brighter because of the RBA’s recent larger-than-expected cash rate rise.

Rising interest rates are a double-edged sword

“While margin compression is likely to continue in the short term, the rising interest rate cycle should ease NIM [net interest margin] pressures and lead to improved profitability for the banks over the medium term,’’ Dring said.

“However, ongoing economic risks point to continued uncertainty for the banking sector’s outlook.”

Rising interest rates are a double-edged sword for ASX 200 bank shares. While it will enable banks to charge more for loans, it also could lead to a deterioration in asset quality and slow loan growth.

ASX 200 bank shares running out of growth options

The positive assessment of the banks’ results was echoed by PwC Australia, which noted they delivered the “cleanest result in years”. But PwC too warned that the momentum could fade.

While there was a general absence of significant one-off charges, such as write-downs and restructuring costs, as banks streamlined and downsized, growth will be harder to come by due to the simplification strategy.

The post What’s the outlook for ASX 200 bank shares amid rising interest rates? appeared first on The Motley Fool Australia.

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Motley Fool contributor Brendon Lau has positions in Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking Corporation. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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