ASX bank shares have been mediocre performers over the past five years, particularly the big four.
The big four banks include:
- Commonwealth Bank of Australia (ASX: CBA)
- Westpac Banking Corp (ASX: WBC)
- Australia and New Zealand Banking GrpLtd (ASX: ANZ)
- National Australia Bank Ltd (ASX: NAB)
But I think the sector could be about to turn a corner.
Here are three reasons I’m bullish on the outlook for ASX bank shares.
1. ASX bank shares benefit from rising interest rates
Bank shares around the globe have been fighting falling interest rates for the better part of 30 years.
But that looks to change, with the United States flagging it would begin tightening this month.
Why is this a bullish sign for banks?
Very simply, a bank earns a return on the spread between the rate it lends at compared to the rate it borrows at.
The spread is also known as the net interest margin (NIM).
When rates increase, the NIM widens, allowing for bigger profits.
Some of the increase will be returned back to customers in the form of higher savings rates.
But expect ASX bank margins to increase relatively faster.
2. Winning where it matters
A lot is made of competition in the banking sector.
Neobanks are nipping at younger digital-native customers. And buy-now-pay-later (BNPL) is moving borrowers away from credit cards.
But to the big banks, these customers are low hanging fruit.
Younger customers have low savings rates, often no home loans or adjacent services. They’re not profitable, and won’t be for many years.
Similarly, credit cards are expensive for a reason: the default rate is high. If BNPL wants to take on the highest risk borrowers, so be it.
The big four ASX bank shares still retain a dominant market share in lending, which is higher margin and less risk.
3. Leaner and meaner
Since the Hayne Royal Commission into the banking sector, the big four have been culling non-core departments.
These include wealth management divisions, insurance services and international subsidiaries.
The big four banks are now more or less Australian household and business lenders.
The impact has been two-fold.
Big banks have derisked. It’s less likely something catastrophic shows up.
Secondly, it’s easier for the market to value. Businesses with lots of divisions often trade at a discount – see News Corp (ASX: NWS).
Less complexity means investors and the market can value appropriately.
