Australia and New Zealand Banking Group Ltd (ASX: ANZ) shares have dropped 4.5% since 1 November 2022. That compares to a 3% rise for the S&P/ASX 200 Index (ASX: XJO), so ANZ has underperformed the market by around 7.5%.
A lot of attention is on the large ASX 200 bank shares of ANZ, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) because of rising interest rates.
However, higher interest rates are not just a free lunch for the big banks. It's also increasing their costs because they have to pay more to savers, and wholesale costs have also increased.
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Broker cautious on ANZ and other bank shares
Last week, my colleague Bernd Struben covered reporting by The Australian that the broker Wilsons was lightening its holdings of three of the major ASX 200 bank shares – ANZ, NAB and Westpac.
The broker said:
After the banks' reporting season over the past few weeks, we have become increasingly cautious on the banks.
The reason for this pessimism is that Wilsons think that the banks may have reached a peak in the net interest margin (NIM).
A bank's NIM measures how profitable its lending is. It compares the overall interest rate of its lending versus the cost of funding that lending.
For example, a $100,000 mortgage with a loan rate of 4.5% may be funded by a $100,000 term deposit costing the bank a rate of 3%. That would be a NIM of 1.5% for the bank.
NIMs have been rising recently as banks have quickly passed on the Reserve Bank of Australia (RBA) increases but have been slower to pass on the rate rises for savers.
According to my colleague Struben's reporting:
The analysts believe the banks have likely reached a peak in net interest margins. They also pointed to a slowdown in the Aussie economy and housing credit amid rapidly rising interest rates. All up they said this means the earnings estimates for the banks are "too optimistic".
The Wilsons Focus Portfolio has reduced its exposure to ASX 200 bank shares to 16.5%.
What's the latest investors have heard?
A month ago, the bank reported its FY22 result, which showed that its total statutory net profit after tax (NPAT) had increased by 16% to $7.1 billion while continuing operations cash profit was up 5% to $6.5 billion.
However, profit before credit impairments, tax and large items was down 3% to $9.1 billion.
Profit movements can have a very big impact on the ANZ share price.
The bank decided to increase its annual dividend per share by 3% to $1.46.
But, ANZ did reveal that thanks to the higher interest rates, it's expected to earn approximately $1.5 billion more net interest income in FY23 and $3.2 billion more in FY25.
Based on ANZ research forecasts, the bank thinks the RBA cash rate will be 3.35% in March 2023 and stay at 3.6% between June 2023 to June 2024.
Time will tell how much higher interest rates can help ANZ's bottom line, how it affects current borrowers and if it helps the ANZ share price over time.
