The financial sector was the standout of the ASX this week amongst a sea of red in the tech sector, with the threat of rising bond yields making banks and other financial institutions potential beneficiaries of the situation.
Australia and New Zealand Banking Group Ltd (ASX: ANZ) was the highlight amongst the big 4 banks, gaining over 9% over the last five days of trading, giving a total 6-month return of roughly 60%. Its shares are trading just above their pre-COVID levels.
Why are bank stocks rallying?
While it’s commonly known that banks typically under-perform in low interest rate environments, the opposite is generally true for times when interests rates are higher.
Banks generate a net interest margin on the difference between interest received from customer loans, and the interest it pays for customer deposits.
If interest rates are expected to rise in the future, this could increase the bank’s earnings potential. Although we’re seeing a rise on the 10-year Treasury note this hasn’t actually resulted in any of the big 4 banks increasing their own rates at this point, so I think part of the rally could be sentiment-driven.
Strong trading update
ANZ did also report some solid numbers from its first-quarter trading update last month.
Cash profit from continuing operations was up 54% to $1.8 billion and brokers forecast an annual dividend of roughly $0.95 per share in FY21, up 71% compared to FY20.
Due to the cyclical nature of banks, as the sentiment improves and we continue to push through COVID-19, it may make sense that bank stocks are out-performing other sectors such as tech that have previously benefited from an interest rate movement in the opposite direction.
Are ANZ shares a buy at current levels?
If you’re after an ASX dividend-paying share that’s likely to be around in the next ten years or so, some ANZ shares might be a strong addition to an income portfolio. Other ASX dividend bank shares include Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB).
I’m more interested in higher growth areas rather than income, and in the case of all of the commercial banks, I struggle to see where any significant upside will come from over the next several years, given their contingency on the overall economic cycle and the housing market.
If you’re after more ideas for dividends, click on this link to ASX dividend shares to find more stock ideas and analysis.
Or, if you’re more into growth shares, click here to read: 2 ASX tech shares I’m watching in March.
