The Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price is off to a good start on Tuesday morning.
At the time of writing, the ASX bank share is up 1.1% at $23.82 a share, despite taking a hit across the past 12 months.
Now, with the interest rates cycle shifting to a new regime, the question is: what does this mean for the bank and its share price?
Are surging interest rates good for ANZ?
Since it began its monetary tightening policies earlier this year, the Reserve Bank of Australia (RBA) has outlined its commitment to stamp out inflation.
In May, it announced the first of five jumps to the cash rate, lifting it from a record low 0.10% to its current level of 2.35%.
While the rate is still relatively low — during 2012, it was at 4.25% — it is the substantial increase from such a low base that is relevant.
Banks have been quick to pass on the jump in base rates to customers via the various interest-bearing products they sell – in particular, mortgages.
Indeed, the surge in rates is typically viewed as a net positive for banks, such as ANZ, as it widens their net interest margins (NIMs) and net interest income (NII) they receive on loaned funds.
It's simple – higher interest rates equals more NII to banks, given the higher mortgage payments borrowers must now make.
Therefore, investors would typically back the banking majors in times such as these as, theoretically, this is the banking sector's time to shine.
Not all as it seems
Despite that theory, however, we have to look at real-world data. As it stands, Australia's mortgage market is heavily saturated and very concentrated.
In 2021, for instance, the 10 largest mortgage providers in Australia made up more than 91% of the entire market.
In a speech to the Australian Financial Review Property Summit 2022 yesterday, head of domestic markets at the RBA Jonathan Kearns noted that commercial interest rates have ratcheted up alongside the cash rate.
Given this 225 basis point increase in the cash rate has been fully passed through to mortgage interest rates, it will have reduced borrowers' maximum loan size by around 20%.
[T]he decrease in borrowing capacity is even larger for prospective borrowers who have existing debt, such as property investors.
In other words, the increase in interest rates impacts a borrower's maximum loan size and their ability to service the repayments.
"Unsurprisingly, because higher interest rates reduce borrowing capacity and increase loan repayments, they typically result in a decline in new housing borrowing," Kearns also remarked.
Undoubtedly, this offsets the perceived gains to ANZ, and other banks, through higher interest payments.
As such, it's not as clear-cut as it seems. If we go by what Kearns says, then it's understandable the ANZ share price has underperformed this year, despite expectations of the opposite.
ANZ share price snapshot
Shares in ANZ remain down almost 13% year to date and 11.6% lower over the past 12 months.
Meantime, the S&P/ASX 200 Financials Index (ASX: XFJ) is down 5.7% and 6.3% respectively over the same time frames.
ANZ has a current market capitalisation of around $71 billion.
