ASX bank shares have pushed higher on Monday in an impressive lunge out of the starting blocks this week.
The S&P/ASX 200 Banks Total Return Index (XBT) is up around 1% on the day, with Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB) leading the way, each up around 1% as well.
Elsewhere, Australia New Zealand Banking Group Ltd (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) are also net gainers on the day but trail the other majors.
What's driving bank shares lately?
The prospects of rising interest rates have investors piling into ASX financials on the potential for stronger profit margins and higher earnings.
That's the view of analysts at Citi and Macquarie, whom each reckon that net interest margins (NIMs) are set to recover sharply over the coming years as the Reserve Bank of Australia (RBA) reshuffles its interest rate regime.
NIMs have been a contentious issue for Aussie banks these past two years. With the cash rate 1 basis point above 0% and real yields on treasury bonds offering similar pessimism, fixed-rate markets have become saturated since the pandemic, a shift that has started to change, Macquarie analysts say.
"With rising fixed rates, mortgage competition has shifted to variable rates," the broker said in a recent note.
"This tightening cycle is set to reshape the sector's earnings profile over the next 2.5 years," Citi analysts wrote in extension, in a separate note.
JP Morgan is onto the same theme, and notes competition has already led to challenges at the NUM level for the larger players.
"There are early signs however that competition in [term deposit] TD markets is beginning to intensify, particularly amongst 2nd tier banks, which have recently started to raise their rates," the broker noted.
"In previous cycles deposit spreads have tended to deteriorate alongside cash rate rises, as competition increases," it added.
"Overall, we expect the more mortgage-heavy major banks (CBA/WBC) to face greater NIM pressure in the ST than NAB/ANZ."
In the meantime, yields on long-dated Australian government bonds crept past 3% for the first time in more than 7 years last week.
That's sent an impulse throughout equity markets, as investors seek to price in the new levels of risk/reward into portfolios.
As such, analysts say a flavoursome recipe made up of fatter margins and wider profits at the bottom line is ready to serve up to investors this year. That also serves as a good indication of why investors are piling into the sector during the last month.
"We upgrade our sector view to positive with earnings changes [greater than] 10%," Citi analysts wrote to clients.
In that time, the sector has spiked up by 7.5% to the time of writing, leading the majority of other segments.
As a group, the banking sector is estimated to yield 4.37% from dividends in FY22, delivering a median 9.78% return on equity (ROE) in the process, according to Bloomberg data.
It also currently trades on a price to earnings ratio (P/E) of 15.95x and 1.59x its book value of equity.
Compared to the S&P/ASX 200 Index (ASX: XJO), which is trading on an 18.16x P/E ratio, 2.3x book value and looks to offer a 4.08% dividend yield, Bloomberg data shows. Although, it is set to produce a 16% ROE in FY22, according to estimates.
