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ASX bank shares have been in the spotlight for investors this year amid the dawn of rising interest rates.
As inflation heats up in much of the Western world, central banks have started raising their official interest rates. The Fed recently raised interest rates by 0.50%, and with the latest U.S. inflation reading still above 8%, more hikes are expected in the coming year.
Last week, the Reserve Bank of Australia (RBA) raised the official cash rate for the first time in more than a decade. The ratio has fallen from an all-time low of 0.10% to its current level of 0.35%. RBA governor Philip Lowe said more rate hikes were expected to reduce Australia’s own fast-rising inflation.
While higher interest rates can be detrimental to many companies, especially growth stocks priced with future earnings in mind, they can actually benefit ASX bank shares. That’s because higher interest rates could see banks increase their loan margins.
But which ASX bank share is best to take advantage of higher interest rates?
For some insight on the subject, we turned to Kate Howitt, Portfolio Manager at Fidelity Australia Opportunities Fund (by australian financial review).
ASX bank shares best for rate hikes
In a rising interest rate environment, Howitt believes the ASX bank stocks investors should consider are Judo Capital Holdings Limited (ASX: JDO).
According to Howitt:
The newly listed Judo Bank provides the most immediate leverage for rising interest rates. Its financing costs are determined by the RBA’s fixed-rate term financing facility, while its interest income automatically increases as interest rates rise. In addition to strong growth in bank lending, this will significantly boost banks’ profit margins.
As an added bonus, since Judo operates in the small and medium-sized enterprise (SME) sector rather than the competitive mortgage sector, its rate-driven upside is unlikely to be wiped out by competition.
How is judo doing?
After struggling for the better part of a year, Judo’s share price has greatly surpassed All common stock index (ASX: XAO) The past few days. This strength may be related to Judo’s two recent reports that its loan book grew 4.1% in the March quarter and is expected to meet or exceed all of its FY22 prospectus metrics.
Shares of Judo closed at $1.72 on Thursday, an increase of 5.85%. It is now up 10.6% since Monday’s close, while All Ords is down 2.5% over the same period.