Podcast: Major banks – Damage priced in is overdone
About the author:
- Author name:
- By Azib Khan
- Job title:
- Senior Analyst
- Date posted:
- 22 June 2020, 12:00 PM
- Sectors Covered:
We have a positive view on the major banks at current share prices, with the exception of CBA. We upgrade our ANZ recommendation to Add. WBC is our preferred major bank and CBA is least preferred.
Bad debt damage reflected in share prices looks overdone
We believe the bad debt damage being factored into current major bank share prices is overdone with the exception of CBA, which is one of the key reasons why CBA is our least preferred major bank.
WBC is the only major bank where we believe the bad debt damage being priced in is greater than that experienced during the GFC, and this is one of the key reasons why WBC remains our preferred major bank.
Across the sector, at this stage we continue to be of the view that the bad debt experience during the current crisis will not be as severe as that experienced during the GFC, largely as this time we are seeing the Australian government and central bank provide cushioning to bank and private sector balance sheets to an extent never seen before.
We generally describe the current credit loss provisioning of the major banks as effectively being predicated on the assumption of a 'squeezed-U-shaped' recovery for the Australian economy, and at this stage this continues to look justified, particularly given the easing of lockdown restrictions being experienced in Australia. More details on this overleaf.
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NIM outlook not too concerning
While we expect the low interest rate environment to continue to be a NIM headwind, we expect the following tailwinds to largely offset this headwind: Reduction in basis risk with swap-OIS spreads now in negative territory; the RBA's Term Funding Facility (TFF); improvement in institutional lending margins; home loan standard variable rates not being reduced in the aftermath of the last official cash rate cut; and strong growth in transaction deposits.
Expecting increased market share to support credit growth
While system credit growth unsurprisingly remains subdued, we expect the major banks to regain home lending market share during this period of funding stress for non-bank lenders (NBLs).
While the Australian Office of Financial Management (AOFM) has pledged funding support to NBLs, we still expect NBLs to experience funding stress, particularly with regards to offering more credit enhancement to their warehouse funding structures and filling any funding gaps left by the exit of mezzanine funders.
Our base case continues to be that FY20 interim dividends will not be paid by ANZ and WBC even on a deferred basis; we expect an update on this front from these banks in August.
Our base case for CBA is that the final dividend for FY20F will not be paid; however, we see a greater probability of this being paid on a deferred basis compared with the interim dividends of ANZ and WBC due to CBA's different reporting cycle.
With the staged easing of lockdown restrictions currently being experienced in Australia and signs of a plateauing in loan repayment deferrals, we expect ANZ, NAB and WBC to declare final dividends in November and we see the possibility of CBA declaring a deferred final dividend in November.
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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.