- What are ASX financial shares?
- Why invest in ASX financial stocks?
- Top financial stocks on the ASX
- QBE Insurance Group
- Insurance Australia Group
- What to look for when buying ASX financial shares
- Pros of investing in financial shares
- Cons of investing in financial shares
- Are ASX financial shares a good investment?
What are ASX financial shares?
ASX-listed companies in the financial sector that offer loans, savings, insurance, and money management or financial services are known as ASX financial shares. They include a range of banking, insurance, asset management, and share brokerage businesses.
While bank shares constitute a significant component of the ASX financial sector, the Australian share market lists many other financial services firms. These include insurance companies, stock market operators, and brokerage firms. Here, we take a look at financial services firms other than banks.
Why invest in ASX financial stocks?
The breadth of the financial sector means it comprises several sub-sectors – each subject to different influences that can impact bottom lines.
Although economic forces affect each sub-sector differently, most financial shares tend to be cyclical. They perform favourably when the economy grows and typically do less well in economic downturns. This means ASX financial shares can be sensitive to economic cycles, resulting in share price volatility.
However, as the financial industry is one of the most critical components of developed economies, investing in this sector can be particularly rewarding.
Companies involved in wealth management and the stock market benefit from strong equity markets with substantial volumes of initial public offerings (IPOs).
Insurers also benefit from strong economies and stock markets. This is because insurers invest the money they receive from premiums. The returns earned on these investments generate a significant proportion of insurance company incomes.
The current rising rate environment benefits financial stocks as it allows them to earn high interest on their yielding assets. Insurers frequently hold plenty of fixed-interest securities to back their insurance policies. Increased rates earned on these securities help pump up profits.
Top financial stocks on the ASX
There are more than 400 companies listed in the financials sector of the ASX. You can invest in individual Australian companies or as a group via an exchange-traded fund (ETF).
The following three companies are some of Australia’s most highly valued financial stocks (based on market capitalisation from high to low).
|Top ASX financial stocks||Company description|
|QBE Insurance Group Ltd |
|An insurance provider with one of the broadest product ranges |
|ASX Ltd |
|Operates the Australian Stock Exchange as a clearing house, |
payments systems facilitator, and market operator
|Insurance Australia Group Ltd|
|The largest general insurance group in Australia and New Zealand |
providing a wide range of general insurance products
QBE Insurance Group
International insurer and reinsurer QBE offers one of the broadest product ranges in Australia. It offers all major general insurance lines to cover personal and commercial risks.
Products include home and contents, motor and travel insurance, and commercial insurance coverage for everything from cargo ships to wineries. At an international level, QBE covers a diverse range of assets, including airports, air fleets, container ports, and construction activities.
QBE demonstrated resilience in the half year to 30 June 2022. The business made good early progress towards its new strategic priorities despite operating against a challenging backdrop. The insurer recorded a half-year net profit after tax (NPAT) of $151 million. Premium growth remains strong, with group-wide renewal rate increases of 8.1% supporting written premium growth of 18%.
ASX is the company behind the Australian Securities Exchange. It acts as a market operator, clearing house, and payments systems facilitator. ASX offers listings, trading, clearing, settlement, technology, data, and post-trade services.
The company operates markets for various asset classes, including equities, fixed income, commodities, and energy. It oversees compliance with market operating rules, promoting high standards of corporate governance among listed companies.
Over the financial year ended 30 June 2022, ASX reported an NPAT of $508.5 million, an increase of 5.7%. Earnings per share (EPS) and the final dividend increased with profits. Operating revenue was up 7.5% to $1022.7 million, driven by growth in listings and equity-related activities.
Insurance Australia Group
The largest general insurance company in Australia and New Zealand, Insurance Australia Group is behind some of the region’s most trusted and respected insurance brands. It provides a wide range of general insurance products to protect homes, lifestyles, and businesses. Its main businesses underwrite more than $12.5 billion in insurance premiums per year under brands including RACV, NRMA, and CGU.
The insurer recently announced its FY22 results, with NPAT of $347 million, up from a $427 million loss in FY21. The performance of the business was steady despite the challenging external environment. Gross written premiums rose 5.7%, and retention rates have improved over the year.
What to look for when buying ASX financial shares
The right ASX financial shares can help grow your wealth, so it is worth taking your time when assessing a potential investment in this sector. Share investing involves risk, so understand your financial goals and investment strategy.
Don’t be afraid to get advice if you need it. Stay across the performance of the economy and financial market, and be aware of how changes can impact the financial outlook of shares.
Stay up to date with announcements by the Reserve Bank of Australia, which sets the cash rate from which other economic interest rates are set. Research and compare companies in the sector you are considering buying shares.
Keep track of companies you are interested in and review their performance regularly. Consider how the listed company in question might contribute to your share portfolio.
Pros of investing in financial shares
- A healthy economy requires a healthy financial sector to provide the services that keep non-financial businesses running. Government regulation aims to ensure the financial sector operates in a way that protects consumers.
- Regulation was overhauled in the wake of the GFC to require banks to hold certain capital levels, lowering the risk of an investment in the sector.
Cons of investing in financial shares
- Financial shares tend to be cyclical –they perform well when the economy is growing and tend to do less well in economic downturns. This means ASX financial shares can be sensitive to economic cycles, resulting in share price volatility.
- Regulation can be costly – a change in the amount or type of regulation of financial companies can impact bottom lines.
Are ASX financial shares a good investment?
ASX financial shares can provide an investor with valuable diversification benefits, dividends, and the potential for capital growth. Whether ASX financial stocks are a good investment depends on whether they fit your investing profile. An investment must be right for you, depending on your financial situation and risk tolerance.
Financial stocks tend to be cyclical, with performance varying depending on economic cycles. For this reason, ASX financial shares may be more suitable for an investor with a longer time horizon. This provides time to ride out economic downturns and benefit from subsequent growth periods.
Before making an investment decision about any financial product, you should consider the advice of your financial adviser or seek financial advice if required.