RBA Hikes Rates to 3.85%: 3 ASX Bank Stocks Set to Benefit from Higher Interest Rates

ASX bank stocks: Who wins from higher rates?

The Reserve Bank of Australia hiked the cash rate by 25 basis points to 3.85% on Tuesday, marking the first increase since November 2023 following a brief period of rate relief in 2025. The decision was unanimous, with all nine board members voting in favour as inflation remains stubbornly above the RBA’s 2-3% target band. After three cuts earlier in 2025 brought the rate down to 3.60%, this reversal signals a significant shift in policy direction. For bank investors, higher rates typically mean wider lending margins, which directly boost earnings. Both NAB and CBA are now predicting a further hike in May, which would take the cash rate to 4.10%.

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Why Higher Rates Help Bank Earnings

Banks make money from the difference between what they charge borrowers and what they pay depositors. This gap is called the net interest margin, or NIM. When the RBA raises rates, banks can lift loan rates relatively quickly, while deposit rates tend to rise more slowly. This widens the NIM and boosts profits.

UBS recently upgraded several bank stocks, noting that a 50 basis point increase in rates during 2026 could deliver “stronger-than-anticipated NIM performance and revenue growth for major banks, exceeding consensus expectations.” The broker believes core earnings may also benefit from higher-than-expected loan growth as businesses continue borrowing.

History supports this view. During the 2022-23 hiking cycle, ASX bank shares significantly outperformed the broader market as margins expanded. However, there’s an important caveat: if rates rise too far, households may struggle with repayments. While arrears remain low for now, this hike tests the limits of household resilience.

3 ASX Bank Stocks Positioned to Benefit

National Australia Bank (ASX: NAB) stands out as UBS’s only buy-rated major bank. The broker believes NAB has “defended the onslaught around its market position in business banking admirably” and should benefit from continued growth in commercial lending. NAB reported a NIM of 1.74% in FY25, with mortgage arrears stable over the year despite credit impairment charges rising to A$833 million. The key risk is whether business borrowers can handle higher rates without defaulting.

Macquarie Group (ASX: MQG) benefits differently from rate rises. The investment bank holds significant cash balances that earn higher interest when rates climb. UBS rates Macquarie as a buy, with the investment case centred on asset realisations, capital deployment, and performance fees within its asset management division. Its diversified earnings base provides some protection if one segment underperforms.

Westpac (ASX: WBC) offers what we believe is the best value among the big four banks right now. It has a similar rate exposure to CBA but trades at a meaningful discount. New CEO Anthony Miller is driving cost cuts through the UNITE technology program, and the bank’s CET1 capital ratio of 12.2% provides strong financial flexibility. For investors wanting rate-sensitive exposure without paying top dollar, Westpac looks attractive compared to CBA’s stretched valuation.

The Investor’s Takeaway

The rate hike cycle favours bank earnings in the short term, but investors should remain selective. CBA trades at around 25 times earnings, roughly 2.5 times the global banking average, leaving little room for disappointment. Much of its quality is already priced in.

The key risks to watch include rising bad debts if households crack under mortgage pressure, with a 25 basis point hike adding around A$90 per month to a A$600,000 mortgage. While arrears are currently stable, consumer stress could escalate quickly if the RBA hikes again in May.

CBA reports half-year earnings on February 11, which will provide critical guidance on NIM trends and credit quality. For investors, NAB offers business lending leverage, Macquarie provides diversification, and Westpac delivers value. All three appear better positioned than CBA at current prices.