Can ASX bank shares deliver in 2023 after higher interest rates?

Can investors bank on this sector to perform well in 2023?

Bank building with the word bank on it.

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

  • The RBA has hiked the official interest rate significantly over the past year
  • ASX bank shares are expected to earn higher profits in this environment
  • NAB shares are my pick of the sector

ASX bank shares are under the spotlight this year as the effect of higher interest rates comes through in the results. Is this where investors should be looking?

The key earnings generator for most of the banks on the ASX is lending. So, the interest rate can play a key role in the profitability of banks.

A bank lends money out for a certain interest rate. But, there is also a cost to the money that it lends out, such as savings accounts or term deposits. The difference between the lending rate and the cost (eg the rate for savers) is known as the net interest margin (NIM).

In 2022, we saw ASX bank shares pass on interest rate rises to borrowers much faster than savers. This is improving bank profitability, with an improvement in the NIM.

The RBA has increased the interest rate from 0.1% to 3.1% over the last 12 months. Under this environment, is the outlook for the sector promising?

Varied share price performance

Over the last 12 months, different banks have seen differing performances.

For example, the National Australia Bank Ltd (ASX: NAB) share price has managed a slight gain over the past 12 months.

Created with Highcharts 11.4.3National Australia Bank PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

Whereas the ANZ Group Holdings Ltd (ASX: ANZ) share price has dropped around 15% over the last year.

Created with Highcharts 11.4.3Anz Group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

The Bank of Queensland Limited (ASX: BOQ) share price has fallen around 17% over the last year.

Created with Highcharts 11.4.3Bank of Queensland PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

Of course, there are a number of other ASX bank shares to look at including Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Bendigo and Adelaide Bank Ltd (ASX: BEN) and MyState Limited (ASX: MYS).

Are ASX bank shares a good opportunity?

The investment giant Blackrock recently pointed out that "higher interest rates bode well for bank profitability".

A number of banks have said they are entering FY23 with a higher starting NIM than what they experienced during FY22.

I personally don't think I would want to buy CBA shares right now because they trade at a much higher price/earnings (P/E) ratio than other banks.

But I like the direction that NAB's leadership is taking the bank in, its profit growth also seems impressive and I think the valuation looks good.

According to Commsec, the CBA share price is valued at 17 times FY23's estimated earnings, while the NAB share price is valued at 12 times FY23's estimated earnings. NAB is projected to pay a grossed-up dividend yield of 8.25% in FY23.

According to the panel of analysts that Commsec follows, only one rates NAB as a sell, while six rate NAB shares as a buy. There are also nine hold ratings.

Should you invest $1,000 in Australia And New Zealand Banking Group right now?

Before you buy Australia And New Zealand Banking Group shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Australia And New Zealand Banking Group wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 7 February 2025

Motley Fool contributor Tristan Harrison 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 positions in and has recommended Bendigo And Adelaide Bank. The Motley Fool Australia has recommended Westpac Banking. 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

A couple sits on a sofa, each clutching their heads in horror and disbelief, while looking at a laptop screen.
Bank Shares

ANZ share price lower following 1Q FY25 report

The banking giant has released its first quarter and pillar 3 reports today.

Read more »

A woman wearing yellow smiles and drinks coffee while on laptop.
Bank Shares

Reporting season has delivered fantastic news for CBA shareholders!

I reckon CBA’s result now seems even more impressive.

Read more »

Shot of a young businesswoman looking stressed out while working in an office.
Bank Shares

NAB share price crashes 7% on Q1 update

This banking giant's shares are coming down to Earth with a thud on Wednesday.

Read more »

A worried woman looks at her phone and laptop, seeking ways to tighten her belt against inflation.
Bank Shares

I'm getting nervous about the CBA share price

The higher CBA climbs, the more nervous I get.

Read more »

A young couple sits at their kitchen table looking at documents with a laptop open in front of them while they consider the state of their investments.
Bank Shares

Did the ASX 200 banks pass on the RBA rate cut in full?

The Reserve Bank of Australia cut interest rates by 0.25% in the first drop in more than four years today.

Read more »

A man looking at his laptop and thinking.
Bank Shares

Are Bendigo Bank shares a buy after diving 16%?

Is this decline a buying opportunity?

Read more »

A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop
Bank Shares

Up 29% in a year, are Westpac shares still a good buy today?

Can Westpac shares keep outperforming the ASX 200 in 2025?

Read more »

Group of successful real estate agents standing in building and looking at tablet.
Bank Shares

3 things about CBA stock every smart investor knows

This is what investors need to be aware of.

Read more »