Rising interest rates mean an uncertain time for ASX finance shares.
Yes, for many banks it's an opportunity to increase their net interest margin. But it can also mean higher delinquencies as customers find it more difficult to make their repayments.
The big four banks are always popular but have limited growth opportunities, which is why many professionals stay away from them.
Instead, here's a pair of finance stocks that experts are recommending as buy right now:
'Undemanding' PE ratio equals buying opportunity
Catapult Wealth portfolio manager Tim Haselum told The Bull that he likes the look of Bank of Queensland Limited (ASX: BOQ), despite some headwinds.
"We believe the banks are facing reducing loan volumes, but we aren't concerned about impairments, as households appear to be in sound financial shape."
Last year, the Bank of Queensland fully acquired ME Bank, which Haselum feels is a positive move.
"We like the ME Bank recovery story and see further synergies ahead," he said.
"Potential net interest margin improvements amid the company's undemanding price/earnings multiple presents a buying opportunity."
BoQ shares have risen 6% since its 20 June trough. The stock is paying out a juicy 6.4% dividend yield.
The Motley Fool reported last week that the team at Citi also recommended BoQ shares as a buy, for much the same reasons as Haselum.
"Although its analysts suspect that the bank's revenue growth could slow if rising rates impact lending volumes, it expects cost synergies from the ME Bank acquisition to support earnings and dividend growth."
This ASX share has been oversold for its risks
Pepper Money Ltd (ASX: PPM) specialises in lending to consumers with non-standard credit history.
With an economic downturn looming, perhaps this has scared off investors. The share price is down more than 28% for the year so far, while paying a 6.45% dividend yield.
Wilsons investment advisor Peter Moran reckons the risk has been overstated.
"While a general slowdown in the economy is a potential risk for lenders, we see this as being excessively priced in with the shares recently trading on 4.5 times earnings," he said.
"We retain an overweight rating."
Reporting season impressed Moran, despite the headwinds buffeting Pepper Money.
"This non-bank lender reported a pro-forma net profit after tax of $73.1 million in the 2022 first half, an 11% increase on the prior corresponding period," he said.
"This was despite a 30 basis points fall in the net interest margin."
The situation is expected to improve for the current period.
"We expect increasing interest rates should contribute to a partial recovery in margins during the second half."
