S&P/ASX 200 Index (ASX: XJO) bank shares have received a lot of airtime in the financial media in the latter half of 2022 amid the new dawn of rising interest rates.
When the Reserve Bank of Australia (RBA) lifted rates from the historic low 0.10% to the still rock bottom 0.35% in May, it represented the first tightening from the central bank in more than a decade.
As rates continued to march higher to today's 2.85%, with more hikes likely, investors have sought out shares that are more likely to outperform in a higher rate environment.
You'll often find ASX 200 bank shares on that list. That's because higher rates enable big bank stocks like Australia and New Zealand Banking Group Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA) to increase their net interest margins.
Yet, as rates ratchet ever higher, that NIM benefit stands to be outweighed by increasing levels of bad debts among the bank's stressed customers.
So are ASX 200 bank shares in for some turmoil ahead or a buying opportunity hiding in plain sight?
Are ASX 200 bank shares a buying opportunity?
According to analysts at Citi, the big banks are well positioned to handle the coming increase in non-performing loans.
That's not to say Citi doesn't expect to see more borrowers default. Its analysts are forecasting a "material pick-up in new impaired assets". However, the broker believes the banks have prepared for that pick-up by increasing their provisions.
According to Citi (courtesy of The Australian):
Despite better revenues than expected, [ASX 200] banks' share prices have had muted reactions, with investors' minds likely looking forward to the impact on asset quality… Unlike past BDD events (GFC, Covid), stress coming from higher rates is an event the banks are anticipating. Consequently, collective provisions are very full, and incremental stress will flow through the individual provision.
Citi has a bullish outlook on the ASX 200 banks when compared to other sectors in the face of economy-hindering high inflation and rising interest rates.
"With bank balance sheets anticipating pending stress in the economy, as opposed to other sectors, we think it should hold them in a good relative position," the analysts said.
Citi added:
[Investors need] to draw a distinction between the deterioration in asset quality (which we agree with), and how it plays through the banks profit and losses. Our forecasts don't imply that the credit stress may be lower than what many expect, only that the provisions are largely prepared for the anticipated event.
How have the big banks fared since rates have started rising?
Over the past six months, the ASX 200 is down a slender 0.2%.
As for the big bank shares, the CBA share price is up 1.8%; Westpac shares are up 2.1%; the NAB share price has dipped 0.3%; and ANZ shares are down 1.6%.
If Citi has this right and ASX 200 investors have been overly pessimistic about the coming rise in bad debts, the big bank shares could indeed prove to be an opportunity hiding in plain sight.
