Fund manager Wilson Asset Management (WAM) has recently picked National Australia Bank Ltd (ASX: NAB) as its preferred S&P/ASX 200 Index (ASX: XJO) bank share.
WAM operates several listed investment companies (LICs). Two of these LICs are WAM Capital Limited (ASX: WAM) and WAM Research Limited (ASX: WAX).
There's also one called WAM Leaders Ltd (ASX: WLE) that looks at the larger businesses on the ASX, often referred to as ASX blue-chip shares.
WAM says WAM Leaders actively invests in the highest quality Australian companies. But does WAM have a good reputation for picking stocks?
The WAM Leaders portfolio has delivered gross returns (before fees, expenses, and taxes) of 14.7% per annum since its inception in May 2016. This compares to the S&P/ASX 200 Accumulation Index average return of 8.3%.
The WAM Leaders team has outlined its thoughts on the current economic situation when it comes to rising interest rates and bank shares.
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WAM makes a quick return on ASX bank shares
The Reserve Bank of Australia (RBA) has been quickly increasing its cash interest rate over the last few months which, according to WAM, has meant there is a "wide range of forecasts" for both house prices and the economy. This sent sentiment in the banking sector to "extremes".
WAM Leaders noted that ASX bank shares significantly underperformed the broader ASX share market in June. The fund management team attributed this decline to the flipping from the initial positive view that rising interest rates would help banks. It now says there's a prevailing view that the rapid rises could hurt the Australian housing market and overall economic growth.
The fund managers said:
We viewed this weakness as exaggerated and tactically went overweight in the banking sector, with the banks then outperforming the market in July.
Still positive on the banks
Wilson Asset Management remains "positive" on the outlook for banks. The fund manager noted that the first bank update, from Australia and New Zealand Banking Group Ltd (ASX: ANZ), showed "improved lending growth, strong underlying net interest margin trends and robust cost control.
WAM thinks that other major ASX 200 banks will report similar, or even better, outcomes.
The fund manager doesn't think that rising bad debts will be a significant issue for banks because household balance sheets and loan-to-debt ratio profiles are "strong" thanks to the house price growth seen in recent years.
However, the team from WAM Leaders did note that credit growth will be "further impacted" and that the market is already forecasting this will reach its lowest level for over 40 years in late 2023.
However, WAM does think that net interest margins (NIMs) across all the banks "should improve" as earlier and larger interest rate rises occur.
NAB shares are the preferred pick
WAM explained which candidate is the favoured big four ASX 200 bank share and why:
Our preference among the banks in this environment remains National Australia Bank. The company continues to deliver above system growth, is overweight business banking which continues to perform strongly and has a capable management team.
Commonwealth Bank of Australia is our next preferred name given its sector leading position, largest deposit base and capital management optionality following the divestment of non-core assets.
