What’s the outlook for ASX 200 bank shares in September?

Now that reporting season is over, investors can consider the updates from S&P/ASX 200 Index (ASX: XJO) bank shares and think about how the rest of 2022 and FY23 might go.

It’s currently a period of rapid transition as households, investors and businesses get used to higher interest rates.

Banks have seen a fair bit of volatility over the past three months.

Names like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) all experienced a sell-off during June. However, since then, they have recovered quite a bit of that lost ground.

What’s going on with interest rates?

There are competing effects of rising interest rates.

On the one hand, higher central bank interest rates can be instantly passed on to borrowers. This gives banks a quick boost in profitability and the net interest margin (NIM). Particularly if they don’t pass on the same increase to savers.

However, there are questions about what this might do to households over the long term. Will the large increase in interest rates mean that heavily indebted households won’t be able to handle it? This will take time to play out there.

The Reserve Bank of Australia (RBA) has been increasing the interest rate at each of the last few monthly meetings. Another increase is expected in September.

The profitability of their current loan books is an important factor for the ASX 200 bank shares. But another element of their performance is how much lending growth they achieve.

Market share concerns

According gto The Age reporting on research by Macquarie Research and APRA, ANZ, CBA and Westpac all lost market share of the all-important housing lending market over the 12 months to July 2022. Only NAB managed to grow its market share over the year to July. It did this with an increase of less than 20 basis points (0.2%).

Smaller players are wanting to muscle in on the big four. It’s not as though they’re going to overtake the big four ASX 200 bank shares, but they can take market share, reduce the big banks’ growth, and put pressure on the margins due to the competition.

Reporting by The Australian highlighted comments by non-bank lender Liberty Financial Group Ltd (ASX: LFG) CEO James Boyle, who said:

With interest rates going up and cost of living pressures continuing, customers are concerned about borrowing to buy homes in an environment where they’re not sure where the interest rates are going to land.

They’re not sure how much inflation is going to eat into their disposable income and they’re not really sure exactly where house prices are going to land either. So I think there’s a bit of a softening, reflecting those uncertainties in home lending.

The newspaper also noted that S&P Global Ratings thinks higher inflation and interest rates will mean tighter lending standards for banks and that “this will allow Liberty Financial to continue to grow in its niche businesses of catering to borrowers that banks typically do not service”.

Foolish takeaway

ASX 200 bank shares and analysts alike think that higher central bank interest rates will mean an improved margin for banks, and analysts are generally expecting an improvement in profit in FY23.

For now, bank investors will need to factor in the RBA’s next move in September and decide what this will mean for their short-term and longer-term profit outlook.

The post What’s the outlook for ASX 200 bank shares in September? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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 Macquarie Group Limited and 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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