Why are ASX 200 bank shares having such a stellar start to the week?

Aussie banks have dominated this last month.

| More on:
Happy man at an ATM.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • ASX bank shares have led the way during the past month of trade 
  • Several majors are looking fine, whilst others lag behind, but data shows there could be further upside ahead 
  • Analysts are constructive on the sector as well, noting the potential for high dividends and return on equity 

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.

TradingView Chart

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.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Bank Shares

Woman holding $50 notes and smiling.
Dividend Investing

Should investors buy Bendigo Bank shares for dividends?

With its high dividend yield, is Bendigo Bank actually the best bank for income?

Read more »

Group of thoughtful business people with eyeglasses reading documents in the office.
Broker Notes

Up 12% in 30 days, is the Westpac share price still a buy?

The banking giant's shares could still offer a notable upside, according to these brokers.

Read more »

A male investor wearing a white shirt and blue suit jacket sits at his desk looking at his laptop with his hands to his chin.
Bank Shares

The CBA share price has been making big news this week. What can ASX 200 investors expect next?

CommBank was all over the news this week as the big bank reported its results for the 2022 financial year…

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
Broker Notes

Could the ANZ share price really offer more than 20% upside?

Brokers tip the ANZ share price will regain its first-half losses and then some.

Read more »

A man in a suit smiles at the yellow piggy bank he holds in his hand.
Bank Shares

How big is the CBA dividend yield right now?

How good is CBA’s dividend yield?

Read more »

A woman looks questioning as she puts a coin into a piggy bank.
Bank Shares

What does CommBank’s latest update mean for NAB shares?

Is CBA coming for NAB’s lunch?

Read more »

A woman in a bright yellow jumper looks happily at her yellow piggy bank representing bank dividends and in particular the CBA dividend
Bank Shares

Is the CBA share price a buy after the bank’s FY22 results?

Is now a good time to buy CBA's shares?

Read more »

Smiling man sits in front of a graph on computer while using his mobile phone.
Bank Shares

Why did the ANZ share price have such a stellar run today?

ANZ shares were on form on Wednesday. Here's why...

Read more »