ASX bank shares have had a slow start to the year, with investor sentiment weighing heavily on share prices, especially for the majors.
This week's interest rate hike and concerns that inflation is spiralling again have created more headwinds for the sector. The spotlight is well and truly on where ASX bank shares will go from here.
But some parts of the sector have a far rosier outlook than others. Here's one ASX bank stock I'd buy right now, and one I'd avoid.
Image source: Getty Images
I'd buy Judo Capital Holdings Ltd (ASX: JDO) shares
Judo is an Australian bank built to provide financial services and lending to small and medium-sized businesses (SMEs) with a turnover under $100 million.
The bank was founded in 2016, received its banking license in 2019 and was listed on the ASX in 2021. So it's new in comparison to the Aussie majors.
What I like about Judo is that it sits apart from the rest of the banks in the sector. Unlike the big four, Judo is purely focused on SMEs, doing so through relationship-based banking rather than mass mortgages or consumer loans.
This business model means that the bank is more sensitive to economic changes, but it also means it has a higher growth potential because it has good customer engagement and, therefore, business momentum.
In its latest results for the first half of FY26, the bank reported strong loan growth and confirmed it was on track to meet its gross loans and advances (GLA) guidance of $14.2 to $14.7 billion in 2026. Judo also plans to boost its profit before tax to $190 million.
At the time of writing on Thursday morning, the bank's shares are down 0.53% to $1.89 a piece. That represents a 5% increase for the year to date.
I'd avoid Commonwealth Bank of Australia (ASX: CBA) shares
I'm concerned that CBA shares are still well above fair value and that they could be due for a price correction this year. In fact, I think they could crash below $100 in 2026.
CBA's price-to-earnings (P/E) ratio at the time of writing is 24.86, which is much higher (and therefore more expensive) than most other banks'.
The banking giant is also facing ongoing margin pressure from intense market competition in lending and deposit products. And the latest interest rate hike could pile even more pressure on the business to perform.
In the short term, an interest rate hike means more earnings for CBA. But in the medium to long term, it can lead to stronger competition and even an increase in mortgage stress. As CBA is heavily exposed to mortgage lending, this could put huge pressure on its share price.
At the time of writing on Thursday morning, CBA shares are 0.5% higher at $153.85. For the year to date, they've dropped 2.01%.
