The Reserve Bank of Australia (RBA) is expected to hike its benchmark interest rate for the sixth time in a row next Tuesday. The financial sector is one that typically benefits from higher interest rate rises, through increased profits.
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So let’s look at how several financial stocks on the ASX are placed in the lead up to the interest rate meeting, focusing on Judo Capital Holdings Limited (ASX:JDO), Resimac Group Limited (ASX:RMC), and Pepper Money Ltd (ASX:PPM).
But first, some background
The RBA is trying to stifle inflation. With recent readings still showing inflation at historic highs, many analysts have revised their predictions for the coming rate hike upward. Many analysts have increased their RBA rate forecast to 0.50%, up from 0.25%.
Increasing interest rates tend to affect certain sectors more than others, for better or worse. The financial sector is among those most sensitive to interest rate changes. While rising rates can mean more expensive loans for borrowers, for banks it can mean a more profitable business. For example, banks can charge more on their loans and generate higher profit margins in their lending divisions.
While it has been a largely volatile market in 2022, ASX financial shares rose almost 1% on Thursday in the lead up to the RBA meeting. However, they are still down more than 9% year-to-date.
Judo Capital share price target suggests over 70% upside
The bank mostly lends to small and medium-sized businesses in Australia. It also provides an array of personal financial products. Judo Capital shares are down nearly 50% since the beginning of the year.
According to TipRanks’ analyst rating consensus, Judo stock is a Strong Buy. The average Judo Capital share price target of AU$1.90 implies over 70% upside potential.
TipRanks’ Insider Trading Activity tool shows that the Insider Confidence Signal is currently Positive on Judo. The company’s corporate insiders such as executives and directors have purchased shares worth AU$556,900 over the past three months.
Resimac Group share price prediction implies 66% upside
Resimac is an alternative lender to home purchase and asset finance markets. RMC shares are down about 45% year-to-date. According to TipRanks’ analyst rating consensus, Resimac stock is a Strong Buy. The average Resimac share price prediction of AU$1.64 indicates over 66% upside potential.
Resimac stock is receiving positive mentions on financial blogs. TipRanks data shows that financial blogger opinions are 80% Bullish on RMC, compared to a sector average of 66%.
Pepper Money share price forecast indicates 47% upside
The company provides home loans, auto loans, and a range of other consumer loans. Although Pepper Money shares have climbed more than 20% over the past three months, they are still down nearly 30% from where they started the year.
According to TipRanks’ analyst rating consensus, Pepper Money stock is a Strong Buy. The average Pepper Money share price forecast of AU$2.11 implies over 47% upside potential.
Pepper Money scores an eight out of 10 from TipRanks’ Smart Score rating system, indicating that the stock has strong potential to outperform market expectations.
Concluding remarks
Rising interest rates have historically been favourable to the financial sector. While there are many ASX financial shares for investors to select from, analysts see Judo Capital, Pepper Money, and Resimac shares as particularly promising.
