Returns from S&P/ASX 200 Index (ASX: XJO) included shares have been hit-and-miss during the past 12 months.
A great example is the chalk-and-cheese performance of the energy and tech sectors. The former cooked up an impressive 30% return, while the latter slapped investors with a 30% downward voyage.
However, investors have been somewhat undecided on which direction one particular collection of companies should be heading. With a mixed bag of returns, ASX 200 bank shares have kept shareholders on their toes as they consider the tug and pull of headwinds and tailwinds.
If the Australian economy does weaken in 2023, the banks are at risk of increased bad debts. But, if the Reserve Bank of Australia (RBA) can orchestrate a ‘soft landing’, this segment of the share market might shift its focus to the major earnings tailwind.
Can you take me higher?
The RBA responded with a resounding yes to the question, “can you take me higher?” as sung by Scott Stapp, lead singer of the band Creed… jacking up interest rates at an unprecedented rate, from 0.1% to 3.1% in eight months.
For everyday Australians with a mortgage, the RBA’s response to inflation has been a painful one. But for ASX 200 bank shares, it has ushered in the return of the ‘good ole’ days’. The days when capital came at a meaningful cost and lenders made considerable margins.
As interest rates have risen, the net interest margin (NIM) has fattened simultaneously. This is because the banks quickly pass on the fall rate increase to loans but aren’t quite as generous when adjusting their deposit rates — as many of us will have experienced firsthand.
The difference in a per cent may not sound like much. But when we’re dealing with loan books like that of the Commonwealth Bank of Australia (ASX: CBA), which reached $883 billion at the end of June 2022 — a slight change to the NIM can add or subtract billions on the bottom line.
Additionally, banks hold what are called ‘non-lending interest earning assets’ on their balance sheets. These are usually some form of low-risk asset — bonds and treasury notes — that provide a fairly stable return. ASX 200 banks are benefitting from increased interest revenue as the central bank cash rate rises.
Based on CBA’s balance sheet, the banking giant would collect an extra ~$674.5 million for every 25 basis point increase.
What’s ahead for ASX 200 bank shares?
The latest data for Australia and the United States suggests inflation might have hit its peak already.
A single data point doesn’t make a trend, but if it turns out to be the case, the continuous interest rate increases could be nearing their end. We will get more information on the rate roadmap at the next RBA meeting on 7 February.
If you can’t wait until February, tonight might serve up some insights into the future of ASX 200 bank shares. The big four of the United States are slated to report earnings tonight, including Bank of America Corp (NYSE: BAC), Citigroup Inc (NYSE: C), JPMorgan Chase & Co (NYSE: JPM), and Wells Fargo & Co (NYSE: WFG).
The post The ASX 200 shares with a multi-billion-dollar tailwind appeared first on The Motley Fool Australia.
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*Returns as of January 5 2023
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More reading
- How I’d invest my very first $500 in ASX shares in 2023
- Which ASX 200 bank shares are the ones to buy in 2023?
- Can ASX bank shares deliver in 2023 after higher interest rates?
- My top predictions for ASX 200 shares in 2023
- Are CBA shares worth buying for dividend income in 2023?
Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Mitchell Lawler has positions in Commonwealth Bank Of Australia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Bank of America, JPMorgan Chase, and West Fraser Timber. The Motley Fool Australia has no position in any of the stocks mentioned. 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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