Banks sector update: COVID-19 impact

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Senior Analyst
Date posted:
19 March 2020, 11:45 AM
Sectors Covered:

  • The spread of COVID-19 is posing a significant threat to the earnings outlook of the banks. Consequently, there is now significant earnings uncertainty over our forecast period. We have downgraded our cash EPS forecasts and dividend forecasts for all four major banks as a result of forecasting lower net interest margins, lower credit growth and more pronounced deterioration in asset quality. We emphasise that there remains significant downside risk to our revised cash EPS forecasts.
  • Based on valuations, Westpac (WBC) is our preferred major bank, followed by National Australia Bank (NAB), ANZ Bank (ANZ) and Commonwealth Bank (CBA). However, in light of the current situation, if we ignore valuations and purely focus on our assessment of risk profiles, then CBA is our preferred major bank, followed by WBC, NAB and ANZ. Taking into account both valuations and overall risk profiles in this environment, WBC is our preferred major bank.

Impact on credit growth: we believe ANZ and NAB are most vulnerable

If a macroeconomic downturn is triggered in Australia by the current situation then we expect business lending growth to suffer most, followed by institutional loan growth and then home lending growth.

We believe NAB's relatively high exposure to business lending makes it vulnerable from this perspective.

While we expect institutional loan growth to be a beneficiary of reintermediation if credit spreads remain at wide levels, we do expect a negative impact on institutional loan growth as banks become more wary of credit quality.

We also point out that we expect the economy of NZ to be impacted more than Australia by a potential downturn in global GDP.

This point, combined with ANZ's relatively high exposure to institutional lending, means that we also view ANZ's credit growth prospects as more vulnerable than that of CBA and WBC.

Impact on net interest margins: we believe ANZ is most vulnerable

We believe ANZ's group NIM is most vulnerable of the major banks in light of the current situation, particularly given that we believe ANZ's NIM is most vulnerable to cuts in the Federal Funds Rate and the Bank of England's base rate.

We believe it is plausible that the current situation can result in an increase in customer deposits with the major banks, of which we would expect the NIMs of CBA and WBC to be the greatest beneficiaries.

Also, we expect to continue to see a shift in customer deposit mix away from term deposits towards at-call deposits, and we expect the NIMs of CBA and WBC to also be the greater beneficiaries of this dynamic.

Impact on credit quality: we believe CBA and WBC are more defensive

If the current situation triggers macroeconomic deterioration in Australia, then we expect meaningful institutional credit losses to arise first, followed by unsecured business and unsecured personal lending losses, followed by secured business lending losses, and we expect meaningful home lending credit losses to arise last.

We believe CBA and WBC are most defensively positioned from this perspective due to their loan books being more skewed to Australian home lending.

More information

Morgans clients can login to view further analysis in our detailed Banks sector report. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: Analyst may own shares.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.

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