The ANZ Group Holdings Ltd (ASX: ANZ) share price has had a good start to the year, rising by around 10%.
Can the ASX bank share be a top idea in the current environment as interest rates keep rising?
With that in mind, let's have a look at what an expert thinks of one of Australia's biggest banks.
ANZ share price rated as a buy
Writing on The Bull, Jed Richards from Shaw and Partners decided to put a buy recommendation on the ASX bank share. Richards said:
The ANZ is our top pick in the banking sector. Australian banks generate about 90 per cent of their earnings from net interest income. Generally, the higher the cash rate, the greater the net interest. ANZ is the cheapest major bank from a valuation perspective, and was recently trading on an attractive grossed up dividend yield of around 7 per cent.
Why do interest rates matter to bank earnings?
As the Reserve Bank of Australia (RBA) cash rate rises, banks are passing on the interest rates to borrowers. This means that households are paying more on their loans and could see even higher rates in the next few months.
However, while savers are seeing interest rate rises, it's not of the same scale or speed as borrowers. This is having the effect of boosting the net interest margin (NIM) of banks.
Higher lending profitability means the bank is on track to generate higher earnings per share (EPS).
How much profit could ANZ make in FY23?
Estimates on Commsec suggest that ANZ could generate $2.35 on EPS in the current financial year.
That would put ANZ shares at under 11 times FY23's estimated earnings.
How does that compare to the other major ASX bank shares?
Looking at the FY23 projected profit numbers on Commsec:
Commonwealth Bank of Australia (ASX: CBA) shares are valued at 18 times forward earnings.
Westpac Banking Corp (ASX: WBC) shares are valued at 11 times forward earnings.
National Australia Bank Ltd (ASX: NAB) shares are valued at under 13 times forward earnings.
So, it is noticeably cheaper than CBA and NAB, while being slightly cheaper than Westpac, on an earnings multiple basis.
