“The obvious risks are what happens with loan losses, but I think the margin expansion story should outweigh that,” Zaia said.

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Morgan Stanley analyst Richard Wiles said in a note he was optimistic about the outlook for margins in the near-term, but there was a risk that debt fears would hit bank share prices later in the year.

“For now, margin expansion and resilient credit quality underpin the earnings outlook. However,
the size and speed of the tightening cycle creates the prospect that weaker volume growth, declining margins, higher costs, and rising loan losses weigh on the banks’ share price performance in the second half of 2023,” Wiles said.

Opal capital portfolio manager Omkar Joshi said markets expected the banks would benefit from higher interest rates for much of 2023, without experiencing much of a rise in bad debts. While the banks’ bad debt charges were likely to eventually climb higher, Joshi said there were no signs of this happening yet, and it may not occur until late 2023 or 2024.

“The fact that margins have improved so much means you’ve got earnings upside for now,” Joshi said.

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Equity markets have had a strong start to the year, with the ASX up more than 6 per cent in January and major bank share prices also climbing in early 2023, amid hopes inflation is cooling.

Joshi noted there had been strong January updates from retailers including JB Hi-Fi and Super Retail Group, and said these suggested higher interest rates were yet to meaningfully slow spending in the economy.

“We have not really seen any material impacts from rates going up yet,” Joshi said.

UBS strategist Richard Schellbach this week said the global picture had “firmed of late”, pointing to China’s reopening, conditions in Europe exceeding expectations, and signs of ongoing spending by Australian consumers.

Goldman Sachs analyst Andrew Lyons this week predicted bank margins would continue to benefit from “tailwinds” in the year ahead, though there was a risk from rising wholesale funding costs.

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