The S&P/ASX 200 Index (ASX: XJO) bank shares are operating in rapidly changing times. COVID-19 was an eventful time and now rapidly rising interest rates are altering the banking landscape.
There are plenty of ASX 200 bank shares for investors to keep an eye on, including the biggest: Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), and Australia and New Zealand Banking Group Ltd (ASX: ANZ).
But, there are also smaller ones such as Bank of Queensland Limited (ASX: BOQ) and Bendigo and Adelaide Bank Ltd (ASX: BEN).
Higher interest rates can have the effect of boosting profitability for banks because the loan rate is being bumped up quickly while the interest rate for savers is rising at a slower pace. This means that the net interest margin (NIM) is now improved compared to the start of the year.
But how are borrowers going to cope with the higher interest rate?
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Good borrowers in focus
According to reporting by The Australian, experts are warning that a "normalisation of bad debts is coming" and that the roll-off of tens of thousands of fixed-interest loans could put pressure on the Australian home loan market.
S&P Global Ratings shows that "prime" home loans were "steady" in September, though arrears for "non-conforming" loans rose.
In August, the arrears of non-conforming loans compared to the total loan amount was 2.07%. But, in September, this rose to 2.24%.
According to the reporting, the amount of non-conforming loans almost doubled to approximately $16 billion in September 2022.
The Australian reported that S&P Global Ratings is expecting a rise in arrears as the economy slows. There is a forecast of higher arrears in January and February after the spending for Christmas.
The newspaper noted some commentary from S&P Global Ratings analyst Erin Kitson that suggested some ASX 200 bank shares are going to lend to "safer" borrowers to preserve market share without hurting the reliability of their loan books.
Chief investment officer from Climate Capital Will Riggall suggested that the three months to September 2022 showed it was being more selective in how it took on risk.
However, this is allowing banks like Westpac and NAB to win those borrowers.
Are CBA shares good value?
Riggall suggests that NAB shares and Westpac shares are better ASX 200 bank share picks than Commonwealth Bank. This is because of CBA's "high price" and the success of the other two banks at "executing growth and transformation strategies."
How expensive are CBA shares? According to CMC Markets, the CBA share price is valued at around 18 times FY23's estimated earnings.
