Should you ‘buy the dip’ in ASX 200 bank shares?

There’s been a pretty major sell-off in ASX bank shares and the dip has really accelerated in June. Here’s what the experts think you should do.

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Key points

  • There's been a sell-off in ASX bank shares following the Reserve Bank of Australia's interest rate decision on 7 June 
  • The big four ASX bank shares have lost between 11% and 15% in value over the past four weeks 
  • Several brokers think the market is worrying too much about how rising interest rates will impact banks' profitability 

Experienced ASX investors love a good market dip. Those who are confident and have been through several market cycles know it’s best to buy when others are fearful, and sell when others are greedy, to borrow a nugget of wisdom from the world’s most successful investor, Warren Buffett.

So, what are the best ‘buy the dip‘ opportunities in front of us today?

In this article, we’ll look at the ASX 200 bank shares. Is there money to be made by investing now for price gains during the recovery — whenever we get to it?

Why is there a dip in ASX 200 bank shares anyway?

So, there’s been a pretty major sell-off in ASX bank shares in recent times. The share prices of the big four are all down in 2022 — like the rest of the market — but the drop really accelerated in June.

The reason? A 50-basis point interest rate hike announced by the Reserve Bank of Australia on 7 June.

The last time the RBA made a change this large was May 2012. A decade ago. That’s how rare it is.

The market expected an increase but 0.5% was a bit of a surprise. People were already worried about how bad inflation was going to get, and how high interest rates would have to go to arrest it.

And if they go too high, could that bring on a recession?

In response to the news, the S&P/ASX 200 Index (ASX: XJO) dropped by 1.2% over 7 June and 8 June.

The S&P/ASX 200 Financials (ASX: XFJ) went harder, losing 5.1% over the same two days. The index tumbled 14.8% in total over the next 10 days to 17 June, when it finally found support.

Don’t rising interest rates mean the banks earn more money?

Sure, rising interest rates mean the banks can charge millions of highly-leveraged Aussie homeowners more interest on their home loans. That’s a lot of extra income too, given Australia has the second-highest household debt in the world behind Switzerland. So, that’s the good part about rising rates for ASX 200 bank shares.

The downside is that when inflation and interest rates are high or rising, people get cautious. They put off upsizing or downsizing and the banks usually see a decline in new mortgage business. Some people have trouble paying their mortgages and become a ‘bad debt’ on their bank’s balance sheet.

Plus, rising global rates mean Aussie banks have to pay more interest on their own new borrowings from overseas wholesale banks to fund new mortgages here. As a result, net interest margins (NIMs) – the difference between the cost of borrowing and the income from loan interest — can decline.

So, they’re the elements worrying ASX bank shareholders. They’re not just concerned about share prices either. They’re also wondering how all these headwinds are going to impact bank dividends.

How big is the dip?

The big four ASX bank shares have lost between 11% and 15% over the past month.

Existing shareholders might see this as an excellent dollar-cost averaging opportunity. But others not already invested in the banks are probably wondering whether buying in now is smart or not.

Let’s go to the experts.

According to reporting in the Australian Financial Review (AFR), top broker Morgan Stanley has recently reduced ASX bank shareholdings in its model portfolio from overweight to underweight.

The broker has cut its price targets on the major ASX bank shares by 15% on average.

In order of preference, Morgan Stanley likes Westpac Banking Corp (ASX: WBC) (overweight), Australia and New Zealand Banking Group Ltd (ASX: ANZ) (equal weight), National Australia Bank Ltd (ASX: NAB) (equal weight), and Commonwealth Bank of Australia (ASX: CBA) (underweight).

What’s worrying the brokers about ASX bank shares?

Fund manager T. Rowe Price worries that the earnings of ASX bank shares could “weaken sharply in the next six to 12 months as slowing growth sparks an increase in non-performing loans”.

But managing director of Plato Investment Management Don Hamson says the market’s worries that higher interest rates will increase loss provisions are “way overdone”. He also says speculation about a potential recession is “way too premature”.

UBS points out that the big banks have $15 billion in provisions between them. John Storey, head of Australian bank research at UBS, says: “There would need to be a substantial blow-up in credit provisions to derail the Australian banks earnings story.”

Brendan Sproules, head of Australian bank research at Citi, agrees. He says: “We find that the current underwriting standards explicitly build a significant level of financial buffer, even for the most leveraged borrowers.”

Citi reckons the recent sell-off is a buying opportunity. Macquarie agrees, calling it a “tactical” buying opportunity (which sounds cooler, right?)

In another AFR story, the chief investment officer at Clime Investment Management, Will Riggall, says his team “will be selectively increasing our position in bank shares through this period of volatility“.

“We see the high and sustainable dividend outlook as a key attraction in what is likely to be a lower-return environment.

We believe house prices are set to decline. However, given the amount of savings held by consumers, we are unlikely to see the sharp increase in defaults that would be needed to offset the positive impact that higher variable rates have on bank earnings.

We have a preference to own stocks with exposure to corporate and government spending, with the Australian consumer likely to remain under pressure.

NAB has been a stellar performer for the portfolio this year, largely driven by the exceptional turnaround under new CEO Ross McEwan.

So, what now?

If you’re keen to buy this ASX bank share dip, better get in quick.

The bottom of the dip looks to have been 17 June.

The S&P/ASX 200 Financials has had a 4.3% rebound since then.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Bronwyn Allen has positions in Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, Macquarie Group 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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