Summary
- Banking space, once market darling, is now under the scanner amidst looming fears of economic downturn, capital buffers, low interest rate regime and credit default risk.
- Despite medium term challenges in the banking sector, the optimistic outlook for the long-term perhaps remains intact.
- Macro-fundamentals, RBA’s monetary policy stance and employment and income scenario of borrowers need to be closely monitored in chartering out future growth trajectory.
While NZ banking space grabbed headlines with RBNZ keeping rates on hold at 0.25% and continuing QE program, AU major banks are showing mixed performance on ASX.
Financial and banking space, once considered as darling stocks by dividend and yield hungry investors, is facing considerable headwinds in the wave of COVID crisis owing to banks’ association with COVID risk exposed businesses, risk of loan defaults, prevalence of low-interest rate regime and mounting deferred loan payments.
Due to uncertainty aroused by the spread of COVID-19, major banks are expected to increase their provisioning to about $27 billion in coming three years. This is further due to anticipated four-fold rise in the stressed exposures of the major banks up to fiscal 2022. As per Morgan Stanley analysis, big banks are having about $640 billion of exposure to industries that are mostly impacted by COVID-19.
National Australian Bank (ASX:NAB) is considered to have the biggest dollar exposure to COVID-19 impacted sectors with highest exposure as a percentage of total and non-mortgage portfolio whereas Commonwealth Bank of Australia (ASX:CBA) is considered to have the lowest exposure.
Banking Players Under Pressure
Banks can be seen to be under immense pressure, while economic stimulus aids are expected to be reversed in September. Besides, Australia's unemployment rate rose to 7.1 per cent in May, increasing anticipation of further increase in non-performing assets.
Australian banks are already facing risk of credit defaults with around $220 billion loan deferrals on personal and SME loans coming to an end, coupled with increased competition that could impact the profitability of banking space.
The sector’s positioning has to be further gauged while the Government is eying policies to support house prices that may potentially help the first home buyers.
Further, banks’ net interest margins seem to be in substantial pressure amidst current uncertainty as Australia’s official cash rate currently stands at a historic low of 0.25%, while negative interest rate scenario is a subject of growing debate.
On an average, banks have reduced their deposit rates just by approximately 50% of the move in the cash rate, which means that banks can further slash their deposit rates.
Any Optimistic Vision in Banking Space?
While banking stocks traded in narrow range since pandemic erupted, the dip in share prices is considered to be bottoming out as the prospects of banks paying dividends perhaps tend to attract investors, while there are some signs of economic revival visible in terms of business expansion and retail trade uptick, while an upbeat tone was maintained by RBA in its latest meeting.
Net interest margins are expected to improve with the Bank Bill/ Overnight Indexed Swap (BILL/OIS) spread moving down into the negative territory.
Market performance of banking players needs to be closely monitored amidst anticipation of improvement in net interest margin, liquidity positions & rebound in economic activities. Despite medium term challenges in the banking sector, the optimistic outlook for the long term remains intact.
With six months loan deferral period approaching its end, some customers are back on their payment schedules. Besides, banks are on their toes to coordinate with people for check-ins with borrowers on their loan repayments, while APRA and Treasury are charting out a plan for borrowers requiring extensions.
What are Macro-Fundamentals Portraying?
While Commonwealth Bank PMI index has been noted at 52.6 in June 2020 from 28.1 in May 2020, figure above 50 depicts uptick in business activities.
The Preliminary Australian Bureau of Statistics data showed that retail sales have moved up by a record 16.3 per cent for the month of May, sparking anticipations of V-shaped recovery.
In the latest speech, RBA Governor maintained an upbeat tone, pointing to better than expected economic and health outcomes till date, strong commodity prices and optimistic projections for Australian economy.
ALSO READ: Charting Out Australia’s Path to Recovery, Are There Any Bright Spots?
Recent Updates of Four Biggest Banks in Australia
Australia and New Zealand Banking Group Limited (ASX:ANZ) has recently signed an agreement to sell its New Zealand’s asset finance business, UDC Finance to Shinsei Bank Limited for the total consideration of NZ$762 million. This sale reflects the price-to-book ratio of 1.2x net tangible assets of NZ$637 million at the end of March 2020.
The sale added approximately AUD$439 million or about 10bps of Level 2 Group CET1 capital at the settlement of transaction. Further, the deal will provide funding of over NZ$2 billion by ANZ New Zealand, which will make the balance sheet stronger.
Moreover, National Australia Bank (ASX:NAB) has raised the Share Purchase Plan (SPP) offer size by A$750 million, which is more than its original target of A$500 million. Therefore, now the bank will be raising a total amount of A$1.25 billion under the SPP, perhaps placing it in strong position to ride through COVID crisis.
Westpac Banking Corporation (ASX:WBC) has sold its Pendal Group stake with placement of about 31 million shares at the offer price of $5.98 per share, the settlement was to be taken place on 22 June 2020.
Meanwhile, Commonwealth Bank of Australia (ASX:CBA) will face the class action proceedings filed by Slater and Gordon in the Federal Court of Australia against the bank in relation to consumer credit insurance for credit cards and personal loans that was sold between 1 January 2010 and 7 March 2018.
Bottomline
Overall, the banking sector stocks have underperformed in the last three months, which are expected to do better in the near term with the reopening of Australian economy.
However, the changes in interest rates, inflation rate, unemployment numbers, monetary supply, liquidity, need to raise fresh capital, bad debts, changes in foreign exchange rates, the general state of the economy, dividends, government policies etc. need to be monitored in charting out growth trajectory of the banking sector.
Disclaimer
There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.
Are you wondering if the year 2020 might not have taken the right start? Dividend stocks could be the answer to that question.
As interest rates in Australia are already at record low levels, find out which dividend stocks are viewed as the most attractive investment opportunity in the current scenario in our report.
