The Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price has had an odd year. The ASX bank share is down 11% in 2022 to date, but it's up 17% since mid-June.
With a rising interest rate environment, some investors may be confused about why the ANZ share price isn't trading higher across the year.
As we know, the Reserve Bank of Australia (RBA) has been increasing interest rates for many months in a row. ASX bank shares like ANZ have passed the higher rates onto borrowers quicker than savers. This has meant that ANZ's lending prospective profitability has increased, which is measured by the net interest margin (NIM).
What's happening in December and beyond?
The RBA is expected to increase the interest rate again by 0.25% this week, though how much further it goes is a big question. Will this be the last rate rise? Or will it need to go further to bring inflation under control? What commentary will the RBA provide about future rises?
ANZ says that the environment will "continue to be supportive for margins in the first half", although any change from the exit NIM margin of 1.8% in September 2022 is likely to be "more modest".
Currently, there are competing thoughts about what a higher NIM means. When ANZ released its FY22 result, it outlined that it was expecting the RBA cash rate to reach 3.60% by June 2023 and stay there for at least 12 months.
This could boost net interest income by $1.5 billion in FY23 and $3.2 billion in FY25. In margin terms, it could boost the NIM by 17 basis points (0.17%) in FY23 and 34 basis points (0.34%) in FY25. This could be why investors have sent the ANZ share price higher in recent months.
ANZ has already seen a major boost to its NIM, and it's saying that more rate increases won't be as much of a boost. But, higher rates would likely hurt its loan book. Borrowers can only absorb a certain amount into their budget before their mortgage repayments are too expensive. That tipping point is when bank bad debts would likely start escalating.
But, ANZ CEO Shayne Elliott pointed out that RBA data showed "aggregate household balance sheets, net of liquid assets, are the best they have been for 15 years". Management believes the business is "in good shape to withstand volatility".
Broker ratings on the ANZ share price
UBS rates ANZ as a buy, with a price target of $30. A price target is where the broker thinks the share price will be in 12 months. The broker will watch the quality of ANZ's loan book and how much it can benefit from deposit pricing.
However, broker Morgan Stanley doesn't think ANZ can rise much further after its run since the middle of the year. Morgan Stanley's price target is $25.50, implying a small rise in the year ahead.
