The current state of the economy suggests a recovery for
-Bank valuation still "reasonable" compared with historical downturns
-Large increases in household savings, expenditure below long-run averages
-Risk to the downside until more clarity on credit quality, dividends, capital
While the current state of the economy appears manageable for
Yet
Regional banks continue to be challenged, nevertheless, and the broker points out both
While NAB's provision coverage is at the low end of peers, its capital position is strong. Meanwhile, ANZ offers greater leverage to an improving economy as and when asset quality concerns subside. Bank stocks appear too cheap to short,
Recent guidance from
On the other side of the ledger, CLSA, while acknowledging it deserves a premium, believes CBA is too stretched and there is more leverage from an improving economy in the other banks. The broker assesses Westpac continues to face underlying earnings pressure and there is uncertainty surrounding the matters raised by the Australian financial intelligence agency, AUSTRAC.
Asset Sales
Citi agrees that asset sales hold the key for Westpac, analysising a potential sale of Westpac's BT business. Westpac is the laggard in offloading of wealth management, a process undertaken by the major banks over recent years.
The complete exit by other major banks has represented sound strategy and execution but the broker believes the implications for Westpac are mixed. BT remains the "jewel in the crown" of those assets that are still in bank hands.
BT is number two in
There is also the issue of whether Westpac could sell the whole business. It is not straightforward for a buyer to find what Citi calculates could be a
Westpac remains the broker's top pick in the sector, given the quality of its book, potential long-term returns and the feasible asset sales that can unlock capital.
Loans
The state of the economy will be the biggest driver of the outlook for loans. CLSA notes the banks all have slightly different definitions of deferral arrangements. Still, the majority have experienced a greater proportion of home loan deferrals from
Major bank deferred loans range across 7-12% of balances for home loans and 14-16% of balances for business loans. The most affected sectors for the latter are those in consumer and property-related industries.
The next date of significance comes at the end of September when the initial six-month deferral period ends. The banks will then find out whether deferred customers are able to move to some form of repayment.
Meanwhile, there has been a large increase in savings, with household deposits up 3% in July, month on month. Expenditure intentions remain well below the long-run average and the national savings rate was up to 20% in the June quarter, from 6% in the March quarter. This also likely reflects a significant one-time boost to cash flow from superannuation withdrawals.
However,
The broker's top pick remains NAB, although its position on small-medium enterprises (SMEs) feels like "right place at the wrong time". In the longer term,
CET1
CLSA expects FY21 CET1 ratios to be weaker across the sector, with the exception of CBA, because of the benefits from divestments. This in turn reflects expectations that bad debts will remain elevated.
Major banks should be able to accommodate this scenario, and the ratios are still envisaged on average at around 10.9% by the end of FY22. Beyond the current crisis, banks are expected to face headwinds to revenue which justifies them still trading at a discount to historical averages, CLSA concludes.
While estimating higher risk weight density is likely to have a negative -120 basis points impact on ratios over the next 2-3 years, the impact is diffused, the broker assumes, as the regulator has provided temporary relief for loans, allowing deferred payments or restructured loans.
Moreover,
Negative Rates
Amid increased discussion around negative interest rates, Credit Suisse notes the Reserve Bank of New Zealand has asked its banks to examine the ability to cope with zero or negative rates, although the
In
The broker describes a negative interest rate, in its simplest form, as a tax on reserves held with the central bank which impacts the profitability of the bank. Negative rates are used to influence the short-term wholesale money market rates.
However, the transmission mechanism is uncertain, as banks would be reluctant to charge a negative interest-rate on deposits, particularly retail. It would also impact the willingness of the bank to lend, as deposits would be switched to cash and therefore affect funding. Net interest income was a driver of 81% of Australian bank revenue in FY19. Moreover, deposits are the main sources of funding for banks and also one of the cheapest.
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