The National Australia Bank Ltd (ASX: NAB) share price and those of its banking peers have held up well, but the best may be yet to come, according to a top broker.
ASX bank shares have outperformed recently even as the S&P/ASX 200 Index (ASX: XJO) struggled against the threat of rising rates, yield inversion and geopolitical conflict.
The interesting thing is that the risk of higher interest rates roiling markets may actually be a blessing to banks.
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NAB share price and other ASX banks on an upgrade cycle
That's the view of Citigroup, which upgraded its position on the bank sector to 'positive' with earnings changes of more than 10% for FY24. The broker said:
This tightening cycle is set to reshape the sector's earnings profile over the next 2½ years.
NIMs [net interest margins] are expected to return to pre-pandemic levels, materially above consensus. Asset quality is a natural concern, but we see a 'sweet spot'.
Default risk not as big a threat
There are a few reasons why the broker isn't worried about asset quality – or the risk of loan defaults as rates rise. It noted that most mortgages were written post the Hayne Royal Commission and that banks have used higher rates to stress-test applicants before approving loans.
Further, many borrowers have a large equity buffer due to surging residential house prices. Citi also pointed out that the ratio of interest payments as a percentage of household disposable income is at a record low of just 5.2%.
If bad debts remain benign and bank profit margins expand thanks to higher rates, the broker thinks sector could enjoy a re-rate.
Good news not priced into NAB share price or other big banks
Citi thinks the market has not woken up to this fact. If the broker is right, we could see ASX banks, including NAB, continue to outperform.
The NAB share price has jumped more than 10% since the start of calendar 2022 and is not far off a four-year high.
The Westpac Banking Corp (ASX: WBC) share price is another outperformer. It's rallied more than 11% over the period.
The Commonwealth Bank of Australia (ASX: CBA) share price delivered a more modest 3% increase. But Australia and New Zealand Banking Group Ltd (ASX: ANZ) is the outlier as it dipped by nearly 2%.
Which ASX bank should you buy?
If you wonder which of the ASX big four banks is best placed to deliver solid returns, Citi favours the 'cheaper' majors.
These are the Westpac share price and ANZ Bank share price. The broker is recommending both as "buy".
Meanwhile, it has a "neutral" rating on the NAB share price and a "sell" on the CBA share price.
