Are bank shares a better investment than bank deposits?
Australia’s big four banks have recorded their highest combined profit since 2018.
Are you better off investing in a bank or investing with one?
The answer in the past year is that you have been much better off buying shares in the banks than taking your cash into the branch and buying their most enticing term deposit, even allowing for rising interest rates.
After the tough years in which banks were slammed by the Hayne Royal Commission, they have made a strong recovery and this year have recorded their highest combined profits since 2018.
Rising interest rates have had a wonderful effect on all of the bank balance sheets with the big four recording combined full-year cash earnings for 2022 of $28.5 billion, up 6.4%, thanks to good net interest income and a low level of troubled loans.
Rising rates pushing up bank share prices
The numbers have recently encouraged investors who have pushed bank share prices upwards with the prospect that loan interest rates will continue to ratchet upwards while deposit rates will lag significantly set to keep bank profits very solid.
In general, net interest margins that measure the cost of funding loans and what the banks charge for those loans have been getting wider and this trend is likely to stay as long as interest rates continue to rise.
Obviously, there are risks in investing in the banks, with the main one being that rising interest rates could eventually start to increase the rate of bad loans, which tends to depress earnings.
Certainly, the concept of writing back provisions for loan losses, which this year saw the banks actually benefit to the tune of $133 million, is unlikely to continue and instead the banks are more likely to start seeing the bad loan risk start to cost them money.
There is also the risk that things are about as good as they are going to get for the banks, with the chances of a recession or worse starting to impinge on further rises in bank shares prices.
Impressive share price rises
However, so far this year, the picture has been good for investors compared to depositors with Commonwealth Bank (ASX: CBA) shares up 6.5%, Westpac (ASX: WBC) shares rising 14.7% and NAB (ASX: NAB) shares gaining 15.8%.
When you add in dividends and franking credits, that is a formidable performance that term deposits available within the banks couldn’t hope to compare to.
Perhaps emphasising that there are risks involved in earning better than bank returns, shares in the only laggard in the big four – ANZ (ASX: ANZ) – are still down 10.7% for the year, not counting dividends.
There could be quite some way to go before the full effect of rising interest rates shows up on the banks bottom line and also in their bad debt provisions.
That time lag could lead to further opportunities for the banks to impress their investors and cause their depositors to grind their teeth in frustration.