What’s JP Morgan saying about ASX 200 bank shares?

JP Morgan is taking a relatively bullish stance on the financials sector.

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ASX 200 bank shares have been a mixed bag these past few months, with shareholders having to stomach wide-ranging volatility in that time.

For instance, the S&P/ASX 200 Financials Index (XFJ) has slipped more than 8% in the past month, indicating weakness in the broad sector.

This activity has analysts at leading investment firms chattering and updating their modelling to clients after the FY21 reporting season.

Investment banking giant JP Morgan has weighed in. It gave its opinion on the outlook for ASX 200 bank shares in a recent note to clients. Let’s take a closer look.

What’s JP Morgan’s stance on Aussie banks?

The broker notes that the FY21 major bank reporting season was “very volatile”. It also notes a large divide on net interest margin (NIM) performance between banks with retail exposure vs business exposure.

It reckons the NIM pressures were driven by mortgage competition and then compounded by higher flows into fixed-rate products. JP Morgan expects these sector trends to persist in the near-term before easing in 2023.

The firm also identifies 10 key issues that may impact ASX 200 bank shares after the reporting season, with a focus on NIM performance, expense ratios, and the outlook in the short term.

Some of these factors include a “minus 7% pre-provision profit growth on softer markets result and higher expenses” and “expense targets requiring a large drop in investment spend,” for example.

Overall, JP Morgan says the sector needs the RBA to lift rates in order for NIMs to stabilise, and that “investors need to be selective on their sector exposures in [its] view.”

What about individual ASX 200 bank shares?

JP Morgan also ranks the major ASX 200 banks shares from 1 to 7 based on several criterion. The firm rates National Australia Bank Ltd (ASX: NAB) as its top pick, with an overweight rating and valuing the bank at $31.40 per share.

Following this comes Macquarie Group Ltd (ASX: MQG). The broker acknowledges its share price has had an extended run, but likes its earnings outlook and is also overweight on its shares.

Filling out the middle of JP Morgan’s ranking are Bank of Queensland Limited (ASX: BOQ), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and Westpac Banking Corp (ASX: WBC). The broker values ANZ and Westpac at $30 and $24.30 per share, respectively.

Where the firm cautions investors is in Bendigo and Adelaide Bank Ltd (ASX: BEN) and Commonwealth Bank of Australia (ASX: CBA). It is neutral and underweight on the shares respectively, noting upcoming risks to earnings for each bank and CBA’s “very expensive valuation”.

Curiously, out of its ASX 200 bank shares coverage, JP Morgan anticipates an upside potential of 26% for Bank of Queensland, assigning a $10 price target in doing so.

That represents the highest margin of safety among the group in the broker’s eyes. It retains an overweight rating on the shares and forecasts $507 million in cash earnings for FY22 for the bank.

Out of its coverage on Australian financials, the firm sees upside potential in all names except CBA, indicating its relatively bullish stance on the sector.

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