How is the Banking Space Charting Out Revival Story in 2021?

Summary

  • Australian banks are mapping out their road to recovery in 2021 as the economy is getting back to shape.
  • Interestingly, banks used their strong capital backing to support customers during COVID-19 era.
  • Advancement in tech-banking services is expected to provide the operational-efficiency in banking space in the near future.
  • Australian Prudential Regulation Authority (APRA) has uncapped dividend restriction on nation’s banks.

The year 2020 dominated by COVID-19 and its implications opened up Pandora’s box of various financial challenges. Meanwhile, the Australian banks were able to put up a good show on the back of strong capital resources, allowing loan deferrals and supporting the customers.

Nevertheless, an EY analysis indicated that the cash earnings of all four major Australian banks plummeted by 36.5% in FY 2020 compared to the previous corresponding period (pcp).

The high volatility and low growth environment led the banks to increase their loan loss provisions. At the same time, tepid demand for credit and the low inflationary scenario amid the pandemic havoc seem to have impacted the revenue streams of the banks.

ALSO READ: Australian banks relatively better positioned for lower rates says RBA

Despite that, the Australian banking space is eyeing to come out of the woods as the economy takes an uphill path, emerging out of the recession. With this backdrop, let us explore how Australian banks are mapping out their path to revive in 2021.

Technical Adoption

The pandemic-induced restrictions and change in consumer behaviour have been fostering the online payments landscape, with a majority of Australians utilising digital and BNPL services. 

For instance, Australia and New Zealand Banking Group Limited (ASX:ANZ) recently partnered with the leading European payment services provider, Worldline, to further improve its online payment and Point-of sale systems for the Australian customers.

Meanwhile, Commonwealth Bank of Australia’s (ASX:CBA) x15ventures has also provided an upfront financing of $0.15 million to Payable Pty Limited, a subsidiary of Identitii Limited (ASX:ID8).

Image Source: Shutterstock

The recent endeavours are in line with the shifting consumers’ focus towards digital payments. Going forth, advancement in the tech-banking services is expected to provide the operational-efficiency in banking space, besides ensuring cost-effectiveness. 

ALSO READ: NAB (ASX:NAB) to sell BNZ Life to Partners Life for $290 million

APRA’s Bank Dividend Relaxation

Australian Prudential Regulation Authority (APRA) in its updated guidance has relaxed dividend payment restrictions on Australian banks. The change will come into effect from the commencement of 2021.

Towards July-end, APRA advised the banks to retain at least half of their earnings, capping the dividend payments. Investors seeking lucrative dividends in the banking sector were initially hit hard when the dividend payment was either deferred or slashed during the pandemic.

However, banking stocks garnered considerable attention when some part of the dividend payment restriction was lifted earlier. The recent relaxation is further expected to keep banking stocks in the limelight over the days ahead.

MUST READ: APRA's new heatmap tightens noose on underperformers

Mortgage Payments Getting Back on Track

Following months of hold, mortgage loan income has started to make its way back to the banks. To recall, the Australian banks offered mortgage holiday to the buyers amid the uncertain COVID-19 times.

Remarkably, the Australian property market has bounced back significantly following the initial pandemic shock. The buoyant real estate market has been one of the major tailwinds supporting the revival of loan payments.

Furthermore, employment figures for November 2020 released by the Australian Bureau of Statistics (ABS) have indicated an M-o-M decline in the unemployment rate to 6.8%. Besides, the employment date indicated an increase in work hours by 2.5%. The recent figures suggest that the labour market has begun to recover towards the pre-pandemic state. As a result, Aussies seem to be in a better position to pay back their loans.

Stock Performance

Australia’s upbeat economic scenario seems to be strengthening the position of banking sectors in the country. Shares of National Australia Bank Limited (ASX:NAB) and Australia and New Zealand Bank Group Limited (ASX:ANZ) have delivered substantial returns of ~34% and ~37%, respectively over the past three months.            

Moreover, shares of Commonwealth Bank of Australia (ASX:CBA) have also generated a significant return of 29.5% over the last three months. Westpac Banking Corporation (ASX:WBC) traded at $19.5 on 24 December 2020, delivering a three-month return of 19.4%.

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