The recent ASX big bank reporting season threw up a few surprises during this rising interest rate environment. And one, in particular, is standing out from the crowd, according to a top broker.
The most surprising thing to emerge from the results was the dramatic change in tune in the big banks' approach to costs.
That was the findings of Citigroup as it noted the complete reset of the major banks' future cost expectations.
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ASX big bank cost target surprise
The National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group Ltd (ASX: ANZ) have already abandoned the cost targets they religiously set previously.
ASX big banks had previously focussed heavily on cost control as that was an effective lever to manage margin pressure when interest rates were at record lows.
The turn in the rate cycle will help them to pad margins, but high inflation is making costs a challenge to manage. The irony is that the winner will be the one that masters the art of cost control.
How to pick the winner
"A rising cash rate is set to accelerate revenue growth for all the major banks," said Citi.
This is likely to lead to a narrowing of the current revenue differences, as lending demand slows. Therefore, EPS growth forecasts in the next few years will be dictated by each bank's cost strategy, so long as asset quality holds up.
There is one ASX big bank share that Citi believes will be in pole position to outperform against this backdrop.
The ASX bank share that is the top buy pick
This is the Westpac Banking Corp (ASX: WBC) share price as Westpac is the only major bank sticking to its cost-savings goals.
At face value, it means Westpac is also likely to be the only ASX big bank to face higher expenses.
"Costs will grow at every bank except WBC, which seems determined to run its own race," added the broker.
"We see WBC as offering the best risk-return equation as well as the strongest EPS growth profile."
What is the Westpac share price worth?
Citi's 12-month price target on the Westpac share price is $29 a share. This implies a 19% upside before dividends and franking are included.
Further, the broker rates the ANZ Bank share price as its second ASX bank share option to buy. This is followed by the NAB share price, which is rated as neutral and Commonwealth Bank of Australia (ASX: CBA) share price, which Citi rates a 'sell'.
