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Key points
- Investors are eyeing ASX banks shares amid rate rise expectations
- The banks underperformed the benchmark following yesterday's RBA announcement
- Macquarie's bullish outlook
ASX bank shares have been under review in recent weeks with the prospect of higher interest rates ahead.
As we looked at on Monday (see the full story here), ASX banks shares would receive some tailwinds from higher rates in the form of increased lending margins. But some of that benefit would be eroded with higher rates negatively impacting the banks' lucrative mortgage markets.
Yesterday the Reserve Bank of Australia (RBA) opted not to follow the hawkish lead flagged by the US Federal Reserve.
At 2:30 pm AEDT the RBA said that while it was halting its bond purchase program on 10 February, the official cash rate would remain unchanged at the current record low 0.10%.
RBA governor Philip Lowe said, "The Board is committed to maintaining highly supportive monetary conditions to achieve its objectives of a return to full employment in Australia and inflation consistent with the target."
How are ASX bank shares responding?
In the 30 minutes directly after the RBA's decision to keep rates at record lows, the S&P/ASX 200 Index (ASX: XJO) gained 0.5%. At time of writing the index is now up 1.3% since the announcement.
As for ASX banks shares, the Commonwealth Bank of Australia (ASX: CBA) share price gained 0.6% immediately following the announcement. CBA shares remain up 0.6% at time of writing as well.
Australia and New Zealand Banking Group Ltd (ASX: ANZ) shares also leapt 0.6% in the half hour after the RBA's rate decision. They've since pulled back a tad to be up 0.4%.
Turning to the National Australia Bank Ltd. (ASX: NAB), the NAB share price gained 0.3% immediately after the announcement and is now up 0.4%.
Which brings us to Westpac Banking Corp (ASX: WBC). Like its peers, Westpac shares gained on the announcement, up 0.5% by 3 pm. At the time of writing, shares are up 0.4% since 2:30 pm yesterday.
How will the banks fare when rates do rise?
There are competing factors at work both helping and hindering the financial institutions' share prices in an environment of increasing interest rates. However, Macquarie for one believes banks should be on investors' radars as rates inevitably head higher.
According to the broker (quoted by the Australian Financial Review):
Considering evolving macro trends, rising inflation, and increasing likelihood of rate hikes, it appears increasingly risky to be underweight banks.
Banks benefit from higher rates, and while we believe the market tends to overestimate the ultimate upside, we see the risk of banks outperforming ahead of and during the early phase of the rate rise cycle.
With ASX banks shares trailing the benchmark since the RBA's decision to keep the cash rate on hold, the pending rate rise cycle is worth keeping an eye on.
