The S&P/ASX 200 Index (ASX: XJO) bank shares have seen a lot of volatility and disruption in 2023. Is October the time to start buying?
This year has seen rising competition in the industry, elevated inflation and multiple hikes of interest rates both in Australia and overseas.
There are numerous banks for us to choose from, including Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) ANZ Group Holdings Ltd (ASX: ANZ), Bank of Queensland Ltd (ASX: BOQ) and Bendigo and Adelaide Bank Ltd (ASX: BEN).
Macquarie Group Ltd (ASX: MQG) and Suncorp Group Ltd (ASX: SUN) both have sizeable banking operations, though make more profit with other divisions.
Is it a good time to invest in ASX 200 bank shares?
When talking to the Australian Financial Review, portfolio manager Philipp Hofflin from Lazard Asset Management revealed that his fund was "very underweight" in the banking sector.
The Lazard investment team believes that the market is underestimating credit risks. Hofflin said:
Given the largest rises in rates since before the 1990 recession and the global financial crisis, amid high levels of household indebtedness, the economic risks are elevated. Based on average historical lags, the monetary tightening so far should reach its full impact by the end of 2024. Within the financials, we prefer general insurers which are big winners from higher yields on their investment funds, without the credit risk.
That seems to be a vote of confidence for Suncorp and Insurance Australia Group Ltd (ASX: IAG) and a warning against ASX 200 bank shares.
Evidence of banking industry problems
The recent BOQ FY23 result showed some of the problems that the industry as a whole could be experiencing.
The ASX 200 bank share's cash earnings after tax were down 8% to $450 million. BOQ saw the net interest margin (NIM) fall by 2 basis points year over year to 1.69% because of heightened competition and housing loan growth declined by 1% amid weaker credit growth in the whole loan system.
BOQ's management decided to moderate growth where economic returns could not be achieved. The bank's loan impairment expense increased by $58 million to $71 million compared to FY22 and represented 9 basis points of gross loans and advances.
In terms of the outlook, the bank said:
The Australian economy has remained resilient, supported by low unemployment and strong cash savings. We anticipate increasing risk into FY24 due to the elevated cost of living, lagged impact and sustained higher interest rates. We will continue to support our customers through this challenging economic cycle.
We anticipate continued revenue and margin pressure to continue in FY24 from slower credit growth and competition. We anticipate that mortgage pricing will need to adjust at some point to provide returns above banks' cost of capital. Heightened deposit competition is expected to remain across the industry through the refinancing of the TFF. Inflationary pressures will be partially offset by our simplification program and we anticipate low single digit cost growth to our underlying cost base, plus investment spend and amortisation as we continue to invest.
We'll see over the next year or so whether Hofflin's pessimism about ASX 200 bank shares is right or not.
