Why are ASX 200 bank shares rebounding on Friday?

A broker has weighed in with their thoughts.

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Key points

  • ASX 200 bank shares are rebounding from their recent sell-off after Macquarie said the sector is likely to issue a positive earnings surprise
  • Despite the upbeat assessment, bank shares could still be in for a volatile few months
  • Interest rate hikes are posing a risk to our highly leveraged property market, which has been the growth engine for bank profits

Embattled ASX 200 bank shares are getting a much-needed reprieve today. The rebound comes as a top broker said the sell-off is a tactical buying opportunity.

Broker Macquarie believes the banks are likely to deliver positive earnings surprises despite the growing macro headwinds buffeting the sector.

ASX 200 bank shares on the rebound

In welcome news for ASX bank shareholders, all the big four banks are gaining today. The Westpac Banking Corp (ASX: WBC) share price is currently up 1.23%, and the National Australia Bank Ltd (ASX: NAB) is climbing 1.38%.

Their peers, the Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group Ltd (ASX: ANZ), are also up 0.58% and 1.88%, respectively.

Their outperformance stands in contrast to the 0.73% drop in the S&P/ASX 200 Index (ASX: XJO).

Earnings surprise on tap

One reason for Macquarie’s upbeat take on ASX banks is their ability to profit from “lazy” money. The broker explained:

While competition for ‘hot’ term deposits (TDs) is intensifying, banks’ ‘lazy’ customers (who are not chasing ‘special rates’ offered by banks) contribute to margin upside. We estimate that ‘lazy’ term deposits are currently one of the more profitable bank segments and should provide [approximately] 4-9bps [basis points] tailwind over the next twelve months.

Profit margin tailwinds

Don’t forget, margins of ASX 200 bank shares are also benefitting from rising interest rates. The upward sloping bond yield curve is another tailwind.

The curve technically allows banks to borrow more cheaply in the near term and lend at higher rates for longer-term loans.

ASX 200 bank shares on a dead-cat bounce?

But to put today’s ASX 200 bank shares rebound in context, they are still nursing heavy losses. The S&P/ASX 200 Banks Index (ASX: XBK) is down around 9% over the past month despite today’s rally.

With the positive note from the analysts at Macquarie, and the fact that the sector is looking very oversold, one might have expected a stronger bounce.

What likely triggered the sell-off was the aggressive interest rate stance taken by our central bankers. They are forecasting more and faster rate hikes, which can put a big dent in the stalling property market.

Dark clouds still hanging over the sector

Banks have started to become more selective on who they lend to, while would-be borrowers have become more wary of taking on debt. This means slowing home loan growth, which is the engine room of growth for our banks.

Further, Bell Potter’s high-profile trader Richard Coppleson believes institutional investors have been dumping ASX 200 bank shares on fears that the lenders will be stuck with a growing book of delinquencies.

Falling property values and a high level of household indebtedness are increasing the risks of bad debts.

The confluence of positive margin drivers and macroeconomic risks will likely make for a volatile period for bank shares over the coming months.

Hang on to your hats, fellow Fools!

Motley Fool contributor Brendon Lau has positions in Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, Macquarie Group Limited, National Australia Bank Limited, and Westpac Banking Corporation. 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 Macquarie Group Limited and 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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