ASX bank shares fell hard on Tuesday, with the bad news coming from the banks' own economists.
Westpac Banking Corp (ASX: WBC) shifted its forecast to a November rate rise, taking the cash rate to 4.60%.
That means all four majors now expect the Reserve Bank to tighten again this year.
The financials sector dropped 1.63% on the day.
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What higher rates actually do to ASX bank shares
The instinct is that rate rises are good for banks, and that is only half true.
Higher rates let banks reprice deposits more slowly than loans, which supports margins for a period.
However, they also slow credit growth, lift arrears and eventually raise bad debt charges.
The most recent results show margins remain stable.
The Commonwealth Bank of Australia's (ASX: CBA) FY26 net interest margin came in at 2.05%, three basis points lower than FY25.
Westpac held its margin steady at 1.89% in the June quarter.
National Australia Bank Ltd's (ASX: NAB) margin slipped two basis points to 1.79%, whereas that of ANZ Group Holdings Ltd (ASX: ANZ) rose one basis point to 1.54%.
Loan losses are also creeping up.
CommBank's loan impairment expense rose 9% to $788 million in FY26.
NAB booked $299 million of credit impairment charges in the third quarter.
What the majors are actually earning
CommBank remains the standout on profitability.
Cash net profit after tax lifted 7% to $11.0 billion in FY26, on operating income of $30.2 billion.
Cash return on equity reached 14.0% and the full-year dividend rose to $5.05 per share fully franked.
Its common equity tier one ratio finished the year at 12.0%.
The quarterly updates from the other three were steadier.
Westpac reported $1.8 billion of net profit excluding notable items, with a 12.1% capital ratio.
NAB delivered $1.83 billion of cash earnings and an 11.93% capital ratio.
ANZ posted $1.90 billion of cash profit in its own third quarter update.
What you are paying for ASX bank shares today
When looking at valuations, this is where the argument becomes more difficult to justify.
CommBank closed Tuesday at $158.69 on a price-to-earnings ratio of 24.6 and a 3.15% yield.
NAB finished at $38.87 on 19.6 times earnings with a 4.33% yield.
ANZ ended at $36.94 and Westpac at $34.58, yielding 4.37% and 4.41% respectively.
Fund manager Wilson Asset Management remains underweight the sector.
Its team pointed to slowing credit growth, rising competition and some deterioration in loan book quality.
Business lending pipelines were described as relatively healthy, while mortgage growth expectations have been revised lower.
Foolish takeaway
A rate hike is not necessarily a huge positive for ASX bank shares, and Tuesday's selling made that point.
The sector is being asked to grow earnings while credit growth slows and households tighten.
I find NAB, ANZ and Westpac far easier to justify than CommBank at 24.6 times earnings.
The yields on those three are genuinely useful, and the capital positions are strong enough to fund them.
What I would not do is buy ASX bank shares purely because the cash rate is heading higher, because the last three hikes have not lifted a single major's margin.
