Are ASX 200 bank shares a buying opportunity hiding in plain sight?

The market is weighing up the potential impact on the ASX 200 banks amid a likely boost in bad debts.

| More on:
A woman pulls her jumper up over her face, hiding.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • ASX 200 bank shares can benefit from higher rates as they can increase their net interest margins
  • On the flip side, fast-rising interest rates will see an increase in the banks' non-performing loans
  • Citi analysts believe the banks are well prepared for the looming rise in bad debts, saying "collective provisions are very full"

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.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Bank Shares

Bank building with the word bank on it.
Bank Shares

The biggest buyers and sellers of ASX 200 bank stocks revealed

Macquarie breaks down who’s been buying and who’s been selling the ASX 200 bank stocks.

Read more »

A young woman sits with her hand to her chin staring off to the side thinking about her investments.
Resources Shares

Should I switch my ASX 200 banking stocks for ASX 200 miners before earnings season?

The ASX 200 Index is dominated by Australia's bank and materials/mining sectors, which together account for around half of the…

Read more »

A man sits in contemplation on his sofa looking at his phone as though he has just heard some serious or interesting news.
Bank Shares

Here's when Westpac says the RBA will now cut interest rates

The RBA surprised everyone by keeping rates on hold last week. So, when will the next cut happen?

Read more »

Hand holding Australian dollar (AUD) bills, symbolising ex dividend day. Passive income.
Bank Shares

This is the ASX bank stock with the largest dividend yield right now

Looking to ASX bank stocks for dividend income right now?

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Bank Shares

ASX banking sector: Is it time to consider a regional bank?

The big 4 banks are widely considered to be overvalued.

Read more »

A person leans over to whisper a secret to a colleague during a meeting.
Bank Shares

Here are the latest growth forecasts for the CBA share price

Can the bank continue rising? Here are some expert views.

Read more »

A businessman presents a company annual report in front of a group seated at a table
Bank Shares

Earnings season predictions: Macquarie weighs in on the big 4 banks

What are the broker's predictions?

Read more »

Contented looking man leans back in his chair at his desk and smiles.
Bank Shares

Major CBA investor reveals why he's all in

This investor described one major reason driving his investment in CBA shares.

Read more »