Bank earnings per share are anticipated to have fallen about 30 per cent last financial year after a 9 per cent fall the previous year, and are tipped for another round of single-digit falls this financial year.
Highly prized
Commonwealth Bank of Australia will give the next best insight into the new world of COVID-19 banking when it reports its full-year results on August 12.
CBA is the best-performing major bank over the past 12 months, with its shares down only 13 per cent compared with a 36 per cent fall for Westpac Banking Group. ANZ and National Australia Bank are both down 33 per cent.
It remains the most highly-prized bank in Australia, trading at a hefty premium to the book value of its assets, indicating that investors still believe it can generate superior returns through the cycle.
The other big banks are trading in line with, or at a discount to, the book value of their assets.
Its a far cry from the time when the banks were collectively generating returns on equity closer to 20 per cent than 10 per cent, justifying price to book multiples of closer to two times.
The performance of the banks can be seen as a reflection of the health of the broader economy, and fears of a deep recession are taking its toll.
One of the biggest issues on the minds of potential investors during COVID-19 is the future economics of loan deferrals.
Introduced by the banks in mid-March, loan deferrals were offered to both consumer and small and medium enterprise customers. Similar programs are in place for personal loans and credit card customers.
APRA said this week that almost 900,000 loans worth a total $266 billion had been deferred. Unpaid interest during this period is capitalised, meaning it is added to the customers outstanding loan balance to be paid over the remaining loan term.
This week the banks extended the maximum term of deferment to 10 months, or March 31, 2021, (whichever comes first), smoothing the curve of potential problem loans in the eyes of bulls but prolonging the potential peak in bad debts until 2022 in the eyes of the bears.
Most deferrals were provided for an initial three-month period, with an option to extend for a further three months, and most banks have been undertaking three-month initial check-ins.
Little clarity
So far there is little clarity about the extent to which the banks will be affected by the emergency measures other than to guess at the proportion of the $266 billion of deferred loans representing 10 per cent of total credit that might ultimately have to be written off.
On one scenario modelled by Goldman Sachs, the banks could be collectively facing $22 billion of losses.
We believe that the performance of these loans … will be the primary driver of sector earnings, capital requirements and therefore share price performance over the next 12 months, the broker says.
Its fair to say the banks dont yet have much clarity on the matter either and even CBAs result will be clouded by the pre- and post-coronavirus environment in the June half.
Some analysts are expecting CBAs final dividend to be cut by 50 per cent and be fully underwritten as second-half impairment charges rise three-fold on the first-half result to $2.2 billion, eroding the bank’s profit and capital base.
The banks mantra will remain that they are well-capitalised and supporting customers through a debilitating period that is not of their making.
Even so, the banks have been quietly lobbying customers to end deferrals.
Its a softly-softly approach with the banks acknowledging they dont have a mandate to kick people out of homes or shutter otherwise viable businesses to protect their collateral as they have done in past downturns.
For the most part, the banks have been praised for the way they have handled the crisis, working hand-in-hand with the federal government and banking regulator APRA to prop up the economy.
Staff engagement scores have risen dramatically as bank employees responded positively to the vital task of keeping capital flowing.
UniSupers Hudson says the banks deserve some praise for a change.
Simon Hudson
Dominic Lorrimer
Almost without exception, every corporate has said how understanding, proactive and flexible the banks have been with them. Its the complete opposite of the GFC. It’s a very difficult situation for bank management but I think they are handling it well so far.
Hudson says the major banks could even emerge with a stronger competitive advantage over their smaller and “disruptor” rivals a remarkable achievement given some of the findings of the royal commission into the sector released last year.
The big banks need to win back trust and what better way to do it than to do the right thing through a crisis, when their customers need their support the most he adds.
Other bank watchers argue we have already witnessed the end of the golden era for Australian banking and shouldnt be looking for a sustained recovery.
For much of the past 100 years, Australian banks collectively made up less than 20 per cent of the Australian sharemarket and steadily climbed towards a peak of 45 per cent in 2015 as the indebtedness of Australian households posted new highs. We could now be in a period of retreat.
The sectors relative importance is once again in a shrinking phase, argues Matt Wilson from broker Evans & Partners.
The pandemic may well have long passed before the worst of the bad debts are recorded, if past recessions are any guide.
Usually the time to buy banks is when you think they’re nearing the peak in bad and doubtful debts or theyll be nowhere near what the market is anticipating or pricing in,” says Hudson.
“But history shows that peak bad debts can significantly lag the economic cycle. Things may be improving more generally but bank earnings and capital can still be under pressure. Its a testing time for any investor to see through this.”
