The ASX bank share with ‘most direct leverage to rising rates’: fundie

Higher interest rates enable banks to increase their lending margins.

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ASX bank shares have been popping onto investor radars this year amid a dawning era of rising interest rates.

With inflation running hot across most of the Western world, central banks have begun to ratchet up their official rates. The US Federal Reserve recently lifted rates by 0.50%, with numerous more rate hikes expected over the coming year as the latest US inflation numbers remain above 8%.

Last week, the Reserve Bank of Australia (RBA) boosted the official cash rate for the first time in more than a decade. The rate went from a historic low of 0.10% to the current 0.35%. RBA governor Philip Lowe flagged that more rate rises are expected to bring down Australia’s own fast-rising inflation level.

While higher interest rates will throw up headwinds for many companies, particularly growth stocks priced with far future earnings in mind, they can actually benefit ASX bank shares. That’s because higher rates can see the banks increase their lending margins.

But which ASX bank share is best placed to capitalise on higher rates?

For some insight into that question, we turn to Kate Howitt, portfolio manager of Fidelity’s Australian Opportunities Fund (courtesy of the Australian Financial Review).

The ASX bank share best set for rising rates

Howitt believes the ASX bank share investors should consider in an environment of rising interest rates is Judo Capital Holdings Ltd (ASX: JDO).

According to Howitt:

Newly listed Judo Bank provides the most direct leverage to rising rates. Its funding costs are anchored by the RBA’s fixed-rate Term Funding Facility, whilst its interest income automatically expands with rate rises. That will provide a significant boost to the bank’s margins, on top of the bank’s strong growth in lending.

As an added bonus, since Judo operates in the small and medium enterprise (SME) sector rather than the highly competitive mortgage sector, its rates-driven upside is less likely to be competed away.

How has Judo been performing?

After struggling for much of the year, the Judo share price has strongly outperformed the All Ordinaries Index (ASX: XAO) over the past few days. That strength is likely linked to two recent reports by Judo, indicating its loan book grew 4.1% in the March quarter and that it expects to achieve or beat all of its prospectus metrics for FY22.

The Judo share price closed on Thursday at $1.72, a gain of 5.85%. It is now up 10.6% since Monday’s close, while the All Ords has lost 2.5% over that same time.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Judo Capital Holdings Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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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