The Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price has experienced increased volatility in the last few months, as has the S&P/ASX 200 Index (ASX: XJO) as a whole. Do things look better for the ASX 200 bank share in October and beyond?
As one of Australia's biggest financial institutions, ANZ is highly connected to the success (or not) of the Australian economy (as well as that of New Zealand).
ANZ has lent out many billions to both households and businesses. The performance of its loan book is important for investor sentiment about the ANZ share price, as well as its profit and dividends.
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Higher interest rates expected
Most readers have probably seen that the Reserve Bank of Australia (RBA) is ramping up the interest rate in Australia to try to get the rate of inflation back down to between 2% to 3%.
How long will this take and how high will interest rates go to try to bring inflation under control? These are important questions, that even the RBA likely doesn't know yet.
Nearly all of the economists surveyed by Finder expect the RBA's October interest rate move to be another 50 basis point increase.
This is quite the change from early in 2022, when a number of economists didn't even think the interest rate would rise this year.
Short-term gain, long-term pain?
For ASX 200 bank shares like ANZ, the increasing interest rate is expected to benefit its short-term profitability, as measured by the net interest margin (NIM).
The NIM shows how much lending profit a bank is making, by comparing its lending rate to the costs it's paying for that funding (such as the rate paid on savings accounts).
Banks are passing on the higher interest rates to borrowers almost instantly. However, savers have not received the same boost, so the NIM is rising.
It could also take a while before the higher interest rates have a noticeably negative effect on ANZ's mortgage book in terms of arrears and bad debts. So, overall profit could be stronger in the shorter term.
What to make of the ANZ share price
According to reporting by Livewire, the broker Jarden says "banks are trading at fair value, regarding positive tailwinds from rising rates are already baked into share prices".
"Its key pick is National Australia Bank Ltd (ASX: NAB), with ANZ the best value pick of the group," Livewire reports.
One broker that's bullish on ASX 200 bank shares is Citi, which rates ANZ shares as a buy with a price target of $29. That implies a possible rise of more than 25% on the current price of $22.77.
Citi thinks banks are going to make good profit on the liquidity that they currently holding, leading to a large double-digit increase of the NIM.
Citi thinks the ANZ share price is valued at under 10x FY23's estimated earnings with a projected grossed-up dividend yield of 9.8%.
