Here’s what higher interest rates could mean for ASX bank shares

Key points

• ASX bank shares are in the spotlight amid rising rate expectations
• Higher rates help banks’ lending margins
• Higher rates could also depress mortgage lending markets

ASX banks shares are in the spotlight as investors are increasingly convinced that the Reserve Bank of Australia (RBA) will follow the US Fed and begin ratcheting up the official cash rate.

Atop the cash rate likely rising from the current historic low of 0.10%, analysts also are flagging an unwinding of the RBA’s bond buying – or quantitative easing (QE) – program.

If you own ASX bank shares, or are thinking of investing, here’s what the prospect of higher rates could mean for the likes of Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), and Westpac Banking Corp (ASX: WBC).

What these experts are saying on rate rises

On the plus side for ASX bank share prices, higher interest rates tend to increase banks’ lending margins. But that benefit could be impacted by higher rates dragging on new lending in mortgage markets. And then there’s the looming end to government pandemic funding benefits.

Commenting on the potential impact on ASX banks shares, Citigroup analyst Brendan Sproules said (quoted by the Australian Financial Review):

Despite a better short-term rate outlook over the next two years, revenue challenges will remain as the unwinding of COVID-related funding benefits (11 basis points), as well as continued mortgage competition (19 basis points), will consume much of the deposit margin benefit…

Higher rates will invariably lower borrowing capacity and pressure the housing market.

While housing market lending could take a hit, Sproules was bullish on the outlook for business lending. “System credit growth will also benefit from accelerating business credit, which we estimate will print 7.5 per cent in financial year 2022 as under-leveraged businesses gear up,” he said.

Jarden analyst Carlos Cacho also thinks ASX bank shares could be battling some headwinds in the year ahead.

According to Cacho (quoted by the AFR):

While 2022 is likely to be a solid year for the Australian economy, we expect it to be a tougher one for the banks – margin pressure, while fading, is set to remain, while credit growth is likely near its peak and mortgage competition remains intense…

Looking ahead, we still expect margin compression but see scope for moderating pressure given support from the repricing of fixed-rate mortgages, higher swap rates and moderating funding cost tailwinds.

Cacho added that he sees “the business-oriented banks” – ANZ and NAB – as “better placed in managing margin contractions in financial year 2022”.

How have these ASX bank shares been performing in 2022?

The S&P/ASX 200 Index (ASX: XJO) is down 6.77% so far in 2022.

By comparison, the NAB share price has fallen 4.13%; the CBA share price is down 5.28%; ANZ shares have lost 0.15%; and Westpac is down 3.37%.

Not exactly shooting the lights out, but all the ASX bank shares are beating the benchmark…so far.

The post Here’s what higher interest rates could mean for ASX bank shares appeared first on The Motley Fool Australia.

More reading

• What to expect from the NAB (ASX:NAB) Q1 update next month
• NAB (ASX:NAB) is the only Aussie bank on this international list of 7,000 companies. Here’s why
• Top broker sees 43% upside for the Westpac (ASX:WBC) share price
• Own CBA (ASX:CBA) shares? Here’s what the big bank reported this week
• Are these beaten down ASX 200 shares now too cheap to ignore?

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 Bruce Jackson.

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