Here’s what higher interest rates could mean for ASX bank stocks

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Key points

  • ASX bank stocks take center stage amid expected rate hikes
  • Higher rates improve banks’ credit margins
  • Higher rates could also depress mortgage markets

ASX bank stocks are in the spotlight as investors grow more confident that the Reserve Bank of Australia (RBA) will follow the US Fed and start raising the official exchange rate.

Above the cash rate likely up from the current all-time low of 0.10%, analysts are also signaling an unwinding of the RBA’s bond-buying program – or quantitative easing (QE).

If you own ASX bank stocks or are considering investing, here’s what the prospect of higher rates could mean for people like Commonwealth Bank of Australia (ASX:ABC), Australia and New Zealand Banking Group Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), and Westpac Banking Corp. (ASX: WBC).

What these experts say about rising rates

On the positive side of ASX bank stock prices, higher interest rates tend to increase bank lending margins. But that advantage could be impacted by higher rates that are holding back new lending in mortgage markets. And then there’s the impending end to government pandemic funding benefits.

Commenting on the potential impact on ASX Banks shares, Citigroup analyst Brendan Sproules said (quoted by the Australian Financial Review):

Despite an improved short-term rate outlook over the next two years, income challenges will persist as the unwinding of COVID-related funding benefits (11 basis points), as well as continued mortgage competition (19 basis points), will consume much of the deposit margin advantage…

Higher rates will invariably reduce borrowing capacity and put pressure on the housing market.

While lending in the housing market could take a hit, Sproules was optimistic about the outlook for business lending. “System credit growth will also benefit from the acceleration in business credit, which we expect will print 7.5% in fiscal 2022 as underleveraged businesses gear up,” he said. -he declares.

Jarden analyst Carlos Cacho also thinks ASX Bank shares could face headwinds in the coming year.

According to Cacho (quoted by the FRG):

While 2022 should be a strong year for the Australian economy, we expect it to be more challenging for banks – margin pressure, although easing, is likely to persist, while growth in the credit is likely close to peaking and mortgage competition remains intense…

Looking ahead, we still expect margin compression, but believe there is room to moderate the pressure given support from fixed rate mortgage price revisions, higher swap rates and the moderation of financing costs.

Cacho added that he saw “corporate-focused banks” – ANZ and NAB – as “better placed to manage margin contractions in fiscal year 2022”.

How have these ASX bank stocks fared in 2022?

the S&P/ASX 200 Index (ASX:XJO) is down 6.77% so far in 2022.

By comparison, NAB’s share price fell 4.13%; the CBA share price is down 5.28%; ANZ shares lost 0.15%; and Westpac is down 3.37%.

Not exactly turned off the lights, but all ASX Bank stocks are beating the benchmark…so far.

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