With interest rates steeply rising over the past four months, ASX shares representing banks have been on the nose.
Even though higher rates can mean more revenue through fatter net interest margins, they also increase the likelihood of reduced loan demand and repayment defaults.
Out of the major banks, two of the most tempting buys at the moment are National Australia Bank Ltd (ASX: NAB) and Macquarie Group Ltd (ASX: MQG).
NAB shares were flying high at $33.60 in April before the Reserve Bank started its inflation fight. They're now trading more than 12.8% lower.
Last November, Macquarie's market capitalisation had ballooned to the point that it pushed Australia and New Zealand Banking Group Ltd (ASX: ANZ) out of the big four.
Macquarie shares then lost almost a quarter of their value since January.
So which one is the better investment if you were to buy in right now?
Banks are better placed for this downturn than the past
Shaw and Partners portfolio manager James Gerrish gave his thoughts on the dilemma in a Q&A in his Market Matters newsletter.
Firstly, he reckons that if the economy falls into a recession, the situation could be much better for banks compared to previous downturns.
"Banks generally struggle in a recession as bad debt [rises] — a result of people losing their jobs and not being able to service mortgages & other debts," said Gerrish.
"This recession would be different. A lack of workers is creating a headwind for growth while household savings rates are very high, with the majority of homeowners well ahead on their mortgages thanks in part to government assistance through COVID."
Another tailwind is that banks are "incredibly well capitalised".
"Those are the positives. One of the biggest negatives would be asset values, which generally come down during a recession — & Macquarie is most exposed here."
Macquarie share price is more likely to discount further
Despite this, because it's wise to buy shares when prices fall, Gerrish's team would be more likely to buy Macquarie shares in the near future.
"Macquarie is a higher beta stock than NAB, which means it will have greater moves relative to the market on both the upside and downside."
Having said this, Gerrish's team would still dip into NAB shares if the stock price fell to an even lower level.
"We do see ourselves buying NAB as well into further weakness given we have some cash up our sleeve."
Both companies are currently handing out healthy dividends. NAB's yield is at 4.8% while Macquarie pays out 3.8%.
