3 cheap ASX shares set to boom with higher interest rates: Wilsons

Most stocks hate when rates rise. But not this trio, which are inexpensive right now and have blue skies ahead, according to Wilsons.

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During a time when most ASX shares are in turmoil, the banking sector has stood tall.

It’s the one industry where the prospect of rate rises doesn’t strike fear, but excitement.

The S&P/ASX 200 Financials (ASX: XFJ)’s outperformance this year against the S&P/ASX 200 Index (ASX: XJO) is testament to this.

The financials index has dropped just 0.64% for the year to date, while the broader ASX 200 is down a painful 5.4%.

But one team of analysts reckon the good times for bank shares have only just started.

Bank margins will only get fatter this year

Wilsons analysts, in a memo to clients, forecast that banks would find business easier as the Reserve Bank of Australia pushes up the cash rate multiple times this year.

“Banks’ margin pressure will likely ease, and ultimately, this will be the key driver of earnings growth over the medium-term.”

This is because as the RBA cash rate moves upward, the big banks often forward the full increase to its loan customers but not to the clients holding deposits.

The difference in the interest paid in and out to those groups is called the net interest margin (NIM), which the bank gets to pocket.

Wilsons has a bullish view of this boost in earnings.

“We believe the net interest margins of the majors will grow faster than consensus forecasts, leading to earnings upgrades over the next two financial years.”

According to Wilsons, Australian banks rake in 80% of their revenue from net interest income.

UBS has calculated that a 25-basis point rise in rates, like what was seen this month, results in a one to three basis point boost in net interest margins.

“We could see the RBA hike rates by 200 basis points over the next 12-18 months, which would equate to an 8-24bps increase in NIMs,” read the Wilsons memo. 

“Taking the middle point, this could deliver a 12% lift in earnings, all things being equal.”

What’s more, the analysts reckon big bank shares are still reasonably inexpensive at the moment.

“We believe bank valuations are still on the cheaper side, which could provide an opportunity for a re-rate in the short-term.”

Which banks are the best buys right now?

The Wilsons team revealed that it has recently increased its weighting to Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group Ltd (ASX: ANZ).

“We believe valuations for Westpac and ANZ will start to rerate as we see margin improvement.”

The team reckons Commonwealth Bank of Australia (ASX: CBA) shares look expensive compared to its peers.

“Although National Australia Bank Ltd. (ASX: NAB) is close to its 10-year average [price-to-book ratio], we think the bank is a better quality bank than it has been over the past decade,” read the memo.

“ANZ and WBC still look cheap on a P/B basis.”

Motley Fool contributor Tony Yoo 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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