The S&P/ASX 200 Index (ASX: XJO) bank share sector has a number of potential ideas to think about.
I think that the big four names of Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and ANZ Group Holdings Ltd (ASX: ANZ) have scale advantages that others in the sector don't have.
Before considering the big four ASX bank shares, I'll point out that my preferred name in the financial share sector is Macquarie Group Ltd (ASX: MQG) because of its global earnings base, long-term growth focus and revenue diversification across different sectors.
The current environment of rising interest rates is seen as a positive for banks because they are able to pass on the interest rate rises faster to borrowers than savers. It's enabling them to increase their net interest margin (NIM).
A NIM measures the overall lending rate of a bank compared to the cost of that funding.
For example, if a bank has lent $200,000 with an interest rate of 4.5%, and there is also a saver with $200,000 in a savings account with an interest rate of 2.5%, this translates into a NIM of 2%.
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Which ASX 200 bank shares could make good investments?
The CBA share price has seen plenty of volatility over the past year. But, it has managed a gain over the past 12 months.
However, one of the main downsides to the bank as an investment at the moment is the valuation. The share price by itself doesn't give much context to whether it's expensive. We can look at the price/earnings (P/E) ratio which shows us what multiple of the earnings the share price is currently valued at. The higher the number, the more expensive it seems.
When comparing similar businesses, such as big banks, a significantly higher P/E ratio can make it stick out.
According to (independent, third party) estimates on Commsec, the CBA share price is valued at more than 17 times FY23's estimated earnings.
CBA is a great bank. However, its business activities are very similar to the other big banks, and I'm not sure it deserves to trade on an earnings valuation that's around a third more expensive.
I think the job that NAB's management is doing at cranking up the performance is very good. The focus on the basics seems to be working as it's leading to profit growth. I believe NAB is in good hands with the CEO and chair. Commsec numbers put the NAB share price at just over 12 times FY23's estimated earnings.
In my opinion, NAB is the leading domestic ASX 200 bank share to choose from.
The other two large banks are also interesting investment considerations. The Westpac share price is valued at just 11 times FY23's estimated earnings. Westpac's cost reduction plan and rising NIM will hopefully be enough for the business to achieve good profit growth, combined with a good dividend yield.
ANZ also trades on a cheap valuation, and the bank's retail division has been improving – its loan processing times are now on the same level as competitors. However, the proposed acquisition of the banking division of Suncorp Group Ltd (ASX: SUN) could be a major distraction for management. Even so, it's only valued at 10 times FY23's estimated earnings.
Expert views
Looking at the analyst ratings on Commsec, seven rate ANZ as a buy, none rate CBA as a buy, six rate NAB as a buy and nine rate Westpac as a buy.
