Top broker tipping turnaround in ASX big bank profit margins

ASX bank stocks are on fire today! And a prediction by JPMorgan that their profit margins could improve will give them an extra boost.

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ASX bank stocks are on fire today! And a prediction by JPMorgan that their profit margins could improve will give investors an extra reason to get excited.

Growing optimism on news of US President Donald Trump’s improving COVID-19 condition is lifting sentiment.

The S&P/ASX 200 Index (Index:^AXJO) rallied 2.4% in after lunch trade but ASX banks are outperforming.

ASX big banks outperforming

The National Australia Bank Ltd. (ASX: NAB) share price, Westpac Banking Corp (ASX: WBC) share price and Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price are up around 3.7% each.

The Commonwealth Bank of Australia (ASX: CBA) share price is lagging its peers but its 2.7% jump still puts it ahead of the broader market.

ASX bank stocks’ margin outlook improving

JPMorgan delivered extra good news for the big four’s net interest margin (NIM) outlook. Investors have been keenly watching this key profitability measure as bank margins have been under pressure from falling interest rates.

It doesn’t help that the Reserve Bank of Australia is tipped to cut the cash rate again in November to a record low of just 0.1%.

NIM is the difference between the interest banks have to pay for its funds and the interest it can charge borrowers.

One of the biggest profit levers

But at least for September, funding costs have eased for the banks and JPMorgan believes this remains one of the best profit levers for the sector.

“Over the last six months, spreads on savings products and TDs [term deposits] have improved by 38ps and 53bps, respectively,” said the broker.

“We estimate this should provide a meaningful tailwind of 3-6bps [basis points] to major bank 1H21 NIMs.”

Low expectations are a saving grace

This equates to around a 3% increase for the big four. This may not sound like much, but any NIM expansion will be warmly welcomed by investors.

This is because expectations are set low for banks, which have been underperforming the market. The fallout from COVID-19 on jobs and the property market have hammered sentiment towards our biggest mortgage lenders.

Even with today’s big bounce, there’s little good news priced into the sector. Also, I believe banks stocks are underheld by fund managers.

Any excuse to turn positive on banks will trigger a big rally.

Big banks have an upper hand

But banks aren’t out of the woods just yet. JPMorgan believes competition for borrowers is heating up with second-tier lenders cutting rates to win business.

On the other hand, the big banks are better placed to win any war of attrition. The big boys have a distinct advantage over their smaller rivals in securing cheaper funding.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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