Which ASX 200 bank shares are the ones to buy in 2023?

In a competitive industry, which are the leading ideas in the banking sector?

| More on:
A woman looks questioning as she puts a coin into a piggy bank.

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

  • CBA is the biggest bank on the ASX, but it also has the most expensive P/E ratio 
  • I think NAB’s management is doing well at the business
  • Westpac and ANZ both trade on cheap valuations

The S&P/ASX 200 Index (ASX: XJO) bank share sector has a number of potential ideas to think about.

I think that the big four names of Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and ANZ Group Holdings Ltd (ASX: ANZ) have scale advantages that others in the sector don't have.

Before considering the big four ASX bank shares, I'll point out that my preferred name in the financial share sector is Macquarie Group Ltd (ASX: MQG) because of its global earnings base, long-term growth focus and revenue diversification across different sectors.

The current environment of rising interest rates is seen as a positive for banks because they are able to pass on the interest rate rises faster to borrowers than savers. It's enabling them to increase their net interest margin (NIM).

A NIM measures the overall lending rate of a bank compared to the cost of that funding.

For example, if a bank has lent $200,000 with an interest rate of 4.5%, and there is also a saver with $200,000 in a savings account with an interest rate of 2.5%, this translates into a NIM of 2%.

Which ASX 200 bank shares could make good investments?

Created with Highcharts 11.4.3Commonwealth Bank Of Australia PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

The CBA share price has seen plenty of volatility over the past year. But, it has managed a gain over the past 12 months.

However, one of the main downsides to the bank as an investment at the moment is the valuation. The share price by itself doesn't give much context to whether it's expensive. We can look at the price/earnings (P/E) ratio which shows us what multiple of the earnings the share price is currently valued at. The higher the number, the more expensive it seems.

When comparing similar businesses, such as big banks, a significantly higher P/E ratio can make it stick out.

According to (independent, third party) estimates on Commsec, the CBA share price is valued at more than 17 times FY23's estimated earnings.

CBA is a great bank. However, its business activities are very similar to the other big banks, and I'm not sure it deserves to trade on an earnings valuation that's around a third more expensive.

I think the job that NAB's management is doing at cranking up the performance is very good. The focus on the basics seems to be working as it's leading to profit growth. I believe NAB is in good hands with the CEO and chair. Commsec numbers put the NAB share price at just over 12 times FY23's estimated earnings.

In my opinion, NAB is the leading domestic ASX 200 bank share to choose from.

The other two large banks are also interesting investment considerations. The Westpac share price is valued at just 11 times FY23's estimated earnings. Westpac's cost reduction plan and rising NIM will hopefully be enough for the business to achieve good profit growth, combined with a good dividend yield.

ANZ also trades on a cheap valuation, and the bank's retail division has been improving – its loan processing times are now on the same level as competitors. However, the proposed acquisition of the banking division of Suncorp Group Ltd (ASX: SUN) could be a major distraction for management. Even so, it's only valued at 10 times FY23's estimated earnings.

Expert views

Looking at the analyst ratings on Commsec, seven rate ANZ as a buy, none rate CBA as a buy, six rate NAB as a buy and nine rate Westpac as a buy.

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 recommended Macquarie Group and 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 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

CBA shares are now worth a total of more than $300 billion. Here's why that's a problem

CBA’s ever growing stock market dominance is raising red flags. But why?

Read more »

An excited man stretches his arms out above his head as he reaches a mountain peak.
Record Highs

Breaking: CBA shares hit a new record of $180

CBA shares can't possibly keep rising can they?

Read more »

A small child in a judo outfit with a green belt strikes a martial arts pose with his hand thrust forward.
Bank Shares

Forget the big 4 banks, Macquarie tips 11% upside for this ASX All Ords Financials stock

This broker is telling investors to look beyond CBA.

Read more »

View of a business man's hand passing a $100 note to another with a bank in the background.
Bank Shares

What price should I pay for the Big 4 banks?

Macquarie has updated its target price on Australia’s Big 4 banks.

Read more »

Bank building with word Bank on it.
Bank Shares

What happened with the big four ASX 200 bank stocks in May?

Guess which ASX 200 bank stock led the charge higher again in May.

Read more »

An ASX investor in a business shirt and tie looks at his computer screen and scratches his head with one hand wondering if he should buy ASX shares yet
Bank Shares

After the recent RBA rate cut, why is Macquarie underweight ASX bank shares?

Macquarie is not banking on strong returns from this sector.

Read more »

Business people discussing project on digital tablet.
Bank Shares

CBA vs Macquarie shares: Which one is best?

Ord Minnett has given its verdict on these giants.

Read more »

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

How the CBA share price smashed the benchmark to close May at all-time highs

I hope you didn’t sell your CBA shares in April!

Read more »