With core inflation stuck at 3.6% and talk of a possible cash rate hike at the next RBA meeting, higher borrowing costs are back in focus and so are the Australian banks and financial stocks most exposed to this news. This period could reward investors who understand which lenders might benefit from firmer margins. In this article you will see 3 stocks from the screener that appear positioned to respond positively to this backdrop.
The three stocks in this article are just a starting sample from the idea, with the full screen surfacing 16 more Australian banks and financial companies with equally compelling stories that are not covered below. To go deeper into this theme, head straight into the Australian Banks and Financials Benefiting from Higher Interest Rates screener and use it to identify, filter and analyze the highest conviction opportunities that fit your own criteria.
Judo Capital Holdings (ASX:JDO)
Judo Capital Holdings is a Melbourne based challenger bank that focuses on lending to Australian small and medium businesses. This ties it closely to the higher interest rate theme because its revenue is heavily driven by lending spreads. Virtually all of its A$404.7 million revenue comes from SME lending in Australia, giving it a pure play exposure to business credit rather than retail banking. The company has a market cap of about A$1.1 billion, which puts it in the small to mid cap bracket on the ASX.
Judo Capital Holdings provides focused exposure to the higher rate theme because its business is almost entirely SME lending, where repricing can feed directly into net interest margins. The bank has built a relationship led franchise that management says is supporting solid profits and a healthy margin. However, the market still prices the stock as if credit problems could spread. Bad loans and relatively low loss provisions are important watchpoints, especially with inflation staying sticky and the RBA sounding more hawkish. If credit quality holds up and provisions remain contained, investors looking for a higher rate beneficiary may consider whether the full story on Judo is reflected in the share price.
Judo Capital Holdings looks like a pure SME lending story, yet the real question is how much risk is already priced in. Get the 5 key rewards and 3 important warning signs that could reset how you view its margin potential and credit threats
MyState (ASX:MYS)
MyState is a Hobart based regional bank that gives you direct exposure to higher Australian interest rates through its core retail and SME lending. Most of its A$251.9 million revenue comes from the MyState Financial Limited group at about A$235.4 million, with a smaller A$16.4 million contribution from wealth management, all earned in Australia. The company has a market cap of roughly A$838.5 million, keeping it in the smaller end of the listed banking sector.
Investors looking for a cleaner way to benefit from a possible RBA rate hike may find MyState interesting because its full service banking model is heavily driven by net interest margin on home loans, SME lending and deposits. Management has been using merger synergies, digital upgrades and a growing equipment finance arm to improve operating leverage and diversify earnings. Arrears and mortgage in possession levels have so far stayed below industry benchmarks even as rates climbed. The flip side is real, with integration costs, ongoing margin pressure from intense competition and a history of less predictable dividends all worth watching closely. If you want a regional bank that could gain from higher rates but still has execution questions to answer, MyState is worth a closer look.
MyState’s shrinking arrears and tighter cost base hint at a story that many investors may be underestimating. Before you decide how it fits into your portfolio, read the 3 key rewards and 2 important warning signs
Liberty Financial Group (ASX:LFG)
Liberty Financial Group is a Melbourne based non bank lender that offers a wide range of home, investment property, car and personal loans, as well as business and commercial property finance across Australia. It fits the higher rate screener theme because its earnings are closely tied to lending volumes and the margin it can earn between funding costs and customer rates. With a market cap of about A$1.1b, Liberty is a mid sized player that gives you broad exposure to Australian credit demand without the traditional bank deposit model.
Liberty Financial Group gives you pure exposure to lending at a time when a more hawkish RBA could keep margins in focus. Revenue of about A$1.4b and net profit margins around 39.5% show a business that currently converts a healthy slice of income into earnings, while revenue growth is forecast to run ahead of the wider Australian market. On the other hand, every dollar of funding comes from external sources rather than customer deposits, which can make the cost of money more sensitive to rate hikes and credit spreads. That mix of strong profitability, a high headline yield and a funding structure that cuts both ways is a key feature for investors considering Liberty within this higher rate theme.
Liberty Financial Group’s strong revenue and profit margin story could be masking a more nuanced funding risk that many investors gloss over. Get the full 3 key rewards and 2 important warning signs (1 is major!)
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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