Can ASX 200 banks really see a 15% profit jump if the cash rate hits 1%?

These analysts are predicting big returns for banks in the rising interest rate environment.

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Key points

  • ASX 200 banks could be set for a 15% surge in profits if the RBA hikes interest rates to 1%, analysts at Bloomberg Intelligence say
  • The move could be a net positive for certain names in the sector, they say, with the big four in particular set to benefit
  • Meanwhile, investment vehicles tracking the sector have held onto a marginal gain this year to date

The new year had originally been kind to ASX 200 banking shares with the sector posting strong gains in the early months.

However, the boon was short-lived, with the Russian invasion of Ukraine and the resulting sanctions sending shockwaves throughout the global banking world.

The Vaneck Australian Banks ETF (ASX: MVB), an exchange traded fund (ETF) tracking the sector, has wavered these past few months but managed to hold onto a 3% gain this year to date.

However, the banking sector is perhaps unlike any other. It puts flesh on the skeleton of the economy, facilitates credit creation, and underpins the very workings of the financial world.

Hence, whilst the world undergoes somewhat of a transformation, with rampant commodity inflation and geopolitical tensions, one might be clever to hone in on banks within the ASX 200.

Profit jump for the banks?

Bloomberg Intelligence analysts Matt Ingram and Jack Baxter reckon Aussie banks’ profits may be 15% higher if the RBA moves as expected.

What they mean is if the RBA hikes the official cash rate in its bid to rein in inflation, this could flow onto other interest rates in the economy.

Currently, the cash rate is resting at 0.35% – or 35 basis points – meaning it would need to spike another 65 basis points to reach the 1% mark.

Such a move would be a net positive to the banking sector’s earnings profile, Bloomberg analysts say, given its sensitivity to the interest rate cycle.

Ingram and Baxter wrote:

Australian banks’ profits may be up to 15% higher than consensus as soon as 1HFY23 with CBA and Westpac gaining the most if the December 2022 RBA cash rate hits 1% as forecast by Bloomberg Economics, we calculate.

Variable home-lending [return on equity] ROEs could hit 14% under this scenario, but the headwind from dearer wholesale funding may offset this somewhat.

Specifically, the duo reckons the Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corporation (ASX: WBC) could be major risers if the RBA lifts the cash rate to 1%, resulting in a large profit jump for both banks.

They forecast:

CBA and Westpac 1H23 earnings may be 12-15% higher than consensus estimates if the RBA lifts the cash rate over 100 basis points by December 2023 as expected by Bloomberg Economics, topping Australia New Zealand Baking Group Ltd (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB). Westpac and CBA have a lower proportion of short-term wholesale funding and much higher interest-rate sensitive deposits, increasing leverage to rising interest rates.

Earlier in the month, the analysts predicted that ASX 200 banks would see a rise of up to 15% in returns on discounted variable rate loans if the RBA hiked rates over 1%.

That’s compared to “a paltry 2-3% at present”, the pair calculated.

As to where the banking sector will head next is anyone’s guess, given the number of crosscurrents currently feeding into Australian markets.

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 Scott Phillips.

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