Some of the biggest businesses in Australia are S&P/ASX 200 Index (ASX: XJO) bank shares. Indeed, financials make up more than a quarter of the ASX 200.
There are plenty of recognisable names within the ASX 200 banking sector, such as: Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), Macquarie Group Ltd (ASX: MQG), Suncorp Group Ltd (ASX: SUN), Bank of Queensland Limited (ASX: BOQ), and Bendigo and Adelaide Bank Ltd (ASX: BEN).
The earnings of each are somewhat different, with differing levels of exposure to non-lending earnings as well as various levels of exposure to different Australian states.
But something that they're all exposed to is rising interest rates and how this may affect their lending.
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ASX 200 bank shares take a dive
Interest rates can have an impact on asset valuations. On top of that, banks are particularly affected within their operations.
So, are rising interest rates a good or bad thing for banks? Interestingly, the market has sent share prices lower since the Reserve Bank of Australia (RBA) move to increase interest rates by 50 basis points, or 0.5%. Remember, share prices are meant to be forward-looking.
Looking at the big four ASX banks since 3 June 2022, the CBA share price has fallen more than 10%, the Westpac share price has dropped 16%, the ANZ share price is down 10%, and the NAB share price has dropped just under 10%.
On the one hand, it is believed that higher central bank interest rates will lead to improved lending margins. This is called the net interest margin (NIM) where the lending rate is compared to the funding costs (such as interest paid to savers using savings accounts). Certainly, savings account interest rates are not rising as quickly as the interest rate on loans.
Broker thoughts on the sector
In FY23, brokers such as Macquarie believe that the ASX 200 bank share NIMs will rise. However, higher interest rates could also come with a problem – higher bad debts. Some households may not be able to cope with the higher interest payments, leading to rising arrears and then loan impairments.
Time will tell whether the profit boost from a higher NIM outweighs the (predicted) higher bad debts or not.
For Macquarie, NAB is its preferred big four ASX bank, with CBA being the least preferred.
Macquarie rates CBA as 'underperform' with a price target of just $78 – that implies a mid-teen fall of the CBA share price in percentage terms. NAB is rated as 'outperform', with a price target of $29.50.
The broker is 'neutral' on ANZ with a price target of $23.50, while the Westpac rating is also 'neutral' with a price target of $22.
However, the broker is expecting growing dividends over FY22 and FY23 for the big four ASX banks.
Macquarie is 'neutral' on Bendigo Bank, with a price target of $10. The broker has a 'outperform' rating on BOQ with a price target of $8. The broker also has an 'outperform' rating on Suncorp, with a price target of $15.
