S&P/ASX 200 Index (ASX: XJO) bank stocks have been through significant volatility since the beginning of COVID-19. Yes, there are some worrying factors to consider. But sometimes it pays to be positive.
In the past few months, I've written about strong competition in the banking sector and the rising funding costs because of higher interest rates on customer deposits (and sources of funding).
It's not surprising that a number of the ASX bank stocks, such as Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB), have dropped more than 10% since early February considering the increasingly competitive environment for banks.
However, there are also a number of reasons to be positive, in my opinion.
Big dividends coming
The higher interest environment has led to banks earning higher profits, for now at least.
Higher earnings per share (EPS) means that banks like Australia and New Zealand Banking Group Ltd (ASX: ANZ), Westpac Banking Corp (ASX: WBC), Commonwealth Bank, and NAB are all expected to grow their dividends in FY23.
This could result in very attractive grossed-up dividend yields from the major ASX 200 bank stocks.
Commsec numbers suggest the ANZ grossed-up dividend yield for FY23 could be 9.4%, the Westpac grossed-up dividend yield could be 9.1%, the NAB grossed-up dividend yield could be 8.6%, and the CBA grossed-up dividend yield could be 6.4%.
Competition is lessening?
While competition may be hurting margins, there are signs that the worst of the competition could be over.
NAB has said it's not going to join in with the strong competition, according to the Australian Financial Review. In fact, we saw some banks increase rates outside of the normal RBA cycle, suggesting that ASX 200 bank stocks may not be competing as hard to win borrowers.
Better valuation
As I've mentioned, we've seen ASX 200 bank stock share prices drop by more than 10% since February. While that's not exactly a crash, it does mean that investors are now able to buy a slice of those businesses at a better price.
The lower the price we can buy bank shares, the higher the dividend yield and the more likely it is that we can achieve capital growth.
Let's look at the current forward price/earnings (P/E) ratio. But remember, these are just forecasts.
The ANZ share price is valued at 10x FY23's estimated earnings.
The Westpac share price is valued at just over 10x FY23's estimated earnings.
The NAB share price is priced at 11x FY23's estimated earnings.
The CBA share price is valued at more than 16x FY23's estimated earnings.
Strong loan books
The big ASX bank stocks collectively saw a very low level of arrears over 2022. It's possible that things will noticeably worsen for them over 2023. But we haven't seen that yet.
If bank loan books perform better than feared, then this could mean better-than-expected profits for banks.
House prices may also perform better than feared, which could mean fewer bad debts than expected, even if loan arrears grow.
On top of all that, the banks do have well-capitalised balance sheets, as measured by the common equity tier 1 (CET) ratios.
Foolish takeaway
When you put all of that together, I think it's possible the banks produce solid total returns from here, even if that's only the dividend return in the short term.
