S&P/ASX 200 Index (ASX: XJO) bank shares have been flying high on investor radars since the Reserve Bank of Australia (RBA) changed its tune on the timing and pace of interest rate rises early this year.
While ASX 200 bank shares haven't been immune to the wider selling pressures impacting markets this year, they've held up far better than the average.
All four of the big banks are slightly back in the green in 2022, while the ASX 200 remains down almost 13%.
Drilling into the price action this week, here's how the banks stacked up to the benchmark index following the RBA's latest 0.50% increase, announced at 2:30pm AEST on Tuesday.
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ASX 200 banks outperforming since Tuesday's rate hike
At the time of writing, since 2:30 on Tuesday:
- The ASX 200 is up 0.3%
- Commonwealth Bank of Australia (ASX: CBA) shares are up 1.9%
- The Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price is up 3.3%
- Westpac Banking Corp (ASX: WBC) shares are up 1.7%
- The National Australia Bank Ltd (ASX: NAB) share price is up 2.1%
While that's encouraging early data for ASX 200 bank shares, dig a little deeper and you'll find that higher rates can both help and hinder their outlook.
What the experts are saying
On the plus side for ASX 200 bank shares, while all have passed on the RBA's rate hike to their variable rate holders, they've been slower to boost the interest paid on deposit accounts, focusing first on boosting longer-term deposits while leaving rates on transaction accounts in the cellar, for now.
Commenting on the interest rate hikes, Jarden chief economist Carlos Cacho believes it's a bonus for ASX 200 bank shares, at least in the shorter term.
According to Cacho (courtesy of The Australian):
I think definitely in the near term it's a big positive. We've obviously seen the banks be pretty fast at putting the rate hikes through to the variable rate mortgages … you're definitely going to see a positive margin expansion in the near term.
On the deposit side we're seeing pretty selective deposit repricing so far from the majors. The repricing of term deposits has so far been focused on the less popular long-dated ones, so think things like the 12 month-plus term deposits. You haven't really seen much repricing in the three to six-month products which tend to be more popular, so that's going to give them a tailwind.
Morgan Stanley also highlighted the better margins as a positive for ASX 200 bank shares, for now (quoted by The Australian):
Higher cash rates and the steep yield curve are shaping up as drivers of a meaningful margin tailwind for the banks. However, the potential for a shift in the deposit mix from low-cost transaction accounts back to higher-cost term deposits and an increase in term deposit rates relative to the cash rate are likely headwinds.
Over the longer term, there are also concerns that the Aussie house market will slow under the pressure of higher rates, reducing loan originations for the banks.
Then there's the competition amongst the ASX 200 banks that could see them come under some pressure.
"Competition in mortgages is going to be pretty intense; we're going to start seeing, over time, that competition in the deposit space is going to increase," Cacho said. "I think probably surprises above expectations at the margin, but then going into next year we're probably seeing a bit of that potentially being given back or being offset by higher competition."
