Many of the ASX 200 bank shares have taken a fall in 2023.

Isn’t that a bit strange, given interest rates have been rising at their fastest pace on record?

The banks make most of their money from lending, so aren’t rising interest rates a positive?

Let’s investigate this together.

ASX 200 bank shares lose up to 17% in 2023

First, let’s check out the state of play for the most well-known ASX 200 bank shares.

Over the year to date, here’s how these bank stocks have performed:

• The Bank of Queensland Ltd (ASX: BOQ) share price has dropped 17%
• The Bendigo and Adelaide Bank Ltd (ASX: BEN) share price has declined 10%
• The National Australia Bank Ltd (ASX: NAB) share price has tumbled 10%
• The Westpac Banking Corp (ASX: WBC) share price has fallen 8%
• The Commonwealth Bank of Australia (ASX: CBA) share price has dipped 3.2%.

Only a couple of ASX 200 bank shares are in the green. They are:

• The Macquarie Group Ltd (ASX: MQG) share price has risen 5.4%
• The ANZ Group Holdings Ltd (ASX: ANZ) share price has ascended 2.7%.

The positives of rising interest rates for ASX 200 bank shares

On the banks’ balance sheets, we see the positive impact of rising interest rates in a number of ways.

One of them is improved net interest margins (NIMs) across the board for all of these companies.

The NIM is the amount of money the banks earn from the interest they are paid by borrowers, less the interest they pay to their savings account holders.

Here’s where the NIMs are today, in descending order:

• Commonwealth Bank NIM of 2.1% for 1H FY23, up 0.23% on 2H FY22
• Westpac NIM of 1.96% for 1H FY23, up 0.05% on 2H FY22
• Bendigo and Adelaide Bank NIM of 1.88% for 1H FY23, up 0.19% on 2H FY22
• Bank of Queensland NIM of 1.79% for 1H FY23, up 0.04% on 2H FY22
• National Australia Bank NIM of 1.77% for 1H FY23, up 0.14% on 2H FY22
• ANZ Bank NIM of 1.75% for 1H FY23, up 0.07% on 2H FY22.

The negatives of rising interest rates for ASX 200 bank shares

There are actually a bunch of negatives, and a few of them are as follows.

Higher interest rates mean the banks have to pay more to deposit holders. As we all know, many banks have been slow to apply higher interest rates to savings accounts but quick to raise rates on loans.

They do this to maximise their profits by raising their NIM.

The highest savings rate available at the moment is 5.3% with the Bank of Queensland. Meantime, most homeowners are paying home loan rates in the 6% to 7% bracket now.

Secondly, the banks are highly leveraged to the Australian property market, and higher interest rates tend to lower sales volumes (meaning fewer new loans) and lower sale prices (due to less buyer demand).

This intensifies competition between the banks for a smaller pool of new loans, prompting them to fork out money on expensive incentives to attract new business, such as cashbacks.

Lastly, rising interest rates tend to boost mortgage stress, which is defined as people spending more than 30% of their income on housing costs. This tends to raise the prevalence of loan arrears and defaults.

So, while the ASX 200 banks are certainly happy to be charging more on their loans, they have to be careful to get the balance right.

The fallout of US bank collapses

Rumblings in the global banking sector are making everyone a bit nervous these days. Some commentators are saying this could be a prelude to a recession in the United States.

The silver lining is that softened prices for ASX 200 bank shares may present a buying opportunity.

Buying the dip is so much more fun when stocks are down for sentiment reasons only.

As my colleague Bernd recently wrote, Australian banks are among the world’s most capitalised, and therefore, they’re considered a pretty safe bet for ASX investors.

Are ASX 200 bank shares a buy?

There are mixed reviews among the brokers at the moment.

Their opinions boil down to their assessment of how each bank is operating, as well as their share price valuations, rather than the universal positive of higher interest rates for ASX 200 bank shares generally.

Let’s do a quick canvas of recent broker notes regarding the big four banks, as well as Macquarie.

CBA shares

The CBA share price closed on Thursday at $98.00, up 0.9%.

Citi has a sell rating on CBA shares on valuation grounds. Its 12-month share price target is $80.

UBS is neutral on Commonwealth Bank with a $100 price target.

Goldman Sachs maintains a sell rating with an $87.78 target on the CBA share price.

NAB shares

The NAB share price is currently $26.40, up 0.8% on Thursday.

Goldman Sachs nominates NAB as its favourite among ASX 200 bank shares today.

This is mainly due to NAB’s comparatively stronger commercial business. The other banks have higher residential property exposure.

The team at Goldman sees “volume momentum over the next 12 months as favouring commercial volumes over housing volumes and we believe NAB provides the best exposure to this thematic”.

Goldman has a buy rating on NAB shares and a $30.69 price target.

For extra perspective, two of our Fool scribblers went head-to-head in a Bull vs. Bear article on NAB shares recently.

Westpac shares

The current Westpac share price is $20.96, up 0.19% on Thursday.

Westpac is the preferred option of the ASX 200 bank shares for the Morgans team.

They have an add rating on Westpac shares with a 12-month price target of $24.22.

Goldman is also a Westapc fan with a conviction buy rating on the shares and a $24.67 price target.

As we revealed recently, Westpac is the preferred ASX 200 bank share in millionaire portfolios.

ANZ shares

The ANZ share price is currently $23.64, up 0.25% on Thursday.

Citi reckons ANZ is the best of the big four ASX 200 bank shares to buy now.

As my Fool colleague James reports, this is largely due to its institutional business, which Citi believes is a key differentiator.

The broker said:

We see ANZ’s unique capabilities as set to deliver relative outperformance in the current market conditions. ANZ is our preferred Major Bank exposure.

Citi currently has a buy rating and a $26.50 price target on its shares.

UBS is buy-rated on ANZ shares with a $25 price target.

Goldman Sachs has a neutral rating and a $26.17 target on the ANZ share price.

Macquarie shares

The Macquarie share price closed at $173.59 on Thursday, up 0.84%.

Morgans has an add rating and a 12-month price target of $201.80 on Macquarie shares.

Morgans comments:

MQG is a quality franchise, exposed to structural growth areas, and the company performed exceptionally well in a more difficult FY23 environment. With >10% share price upside to our price target, we continue to maintain our ADD recommendation.

Goldman has a neutral rating on Macquarie Bank shares with a $192.01 price target.

Shaw and Partners portfolio manager James Gerrish says Macquarie shares are a buy because the business offers more earnings diversification than other ASX 200 bank shares.

Gerrish says:

Ultimately, it’s the reason we like the stock. Different divisions perform differently at different times and that creates a nice level of diversification in their earnings.

As we reported recently, Macquarie has the highest profit margin of the ASX 200 bank shares.

Foolish takeaway

Higher interest rates may be a tailwind, on balance, for ASX 200 bank shares, but this doesn’t guarantee that all of them will do well in this climate.

In a clear demonstration of this, Warren Buffett recently sold some bank stocks but kept others.

So, it’s best to remain discerning when choosing which ASX 200 bank shares to hold or invest in today.

For extra reading, we compared the dividend yield and share price growth of the big four over five years.

The post With interest rates rising, why have ASX 200 bank shares been pummelled in 2023? appeared first on The Motley Fool Australia.

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More reading

• Invested $6,000 in NAB shares in November? Here’s how much passive income you’ve already banked
• Why ANZ shares are Citi’s top banking pick
• An ASX dividend giant I’d buy over CBA shares
• Investing in ANZ shares? Here’s what’s happening with the bank’s $3.5 billion Suncorp acquisition
• These ASX dividend stocks have been tipped to offer big yields

Motley Fool contributor Bronwyn Allen has positions in ANZ Group, Commonwealth Bank Of Australia, Macquarie Group, 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 positions in and has recommended Bendigo And Adelaide Bank and Macquarie Group. 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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