Banks: Damage priced in is overdone (Part 2)

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Senior Analyst
Date posted:
26 October 2020, 3:50 PM
Sectors Covered:
Banks

  • Despite recent share price strength, we retain a positive view on the major banks with the exception of CBA. While we acknowledge that the sector is not offering attractive revenue growth prospects, we believe the extent of bad debt damage being priced in is generally overdone and we believe this factor is creating attractive value opportunities for investors.
  • On a 12-month view, we believe the value on offer is attractive enough to compensate for near-term dividend uncertainty stemming from dividends being tied to statutory earnings under APRA's current dividend restrictions.

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Not expecting adverse revisions to macroeconomic assumptions

We believe the bad debt damage being factored into current major banks share prices is overdone with the exception of CBA. We believe the last disclosed expected credit loss (ECL) provisioning bases of the major banks can still be justified based on the following factors:

  1. Loan deferrals are declining;
  2. The restructuring option provided by APRA and the proposed reforms to responsible lending obligations;
  3. Recent improvement in the unemployment rate;
  4. JobMaker and other fiscal stimuli announced in the recent Federal Budget;
  5. Upgrades to consensus dwelling price forecasts; and
  6. Potential for further easing of the RBA's monetary policy.

In fact, we do not expect the major banks to adversely revise the macroeconomic assumptions and scenario weightings feeding into their respective ECL provisions when they report FY20 results in late October and early November.

Perhaps this explains why we appear to have the lowest credit impairment charge forecasts for FY20 across ANZ, NAB and WBC as per FactSet data. Having said this, we acknowledge that there remains much uncertainty about the macroeconomic outlook for as long as COVID-19 remains a material threat to public health.

For this reason, we are forecasting further ECL provision top-ups for the major banks over our forecast period.

However, FactSet consensus credit impairment charge forecasts are more pessimistic than our forecasts and we believe the asset quality damage factored into share prices – with the exception of CBA – is overdone.

NIM outlook not too concerning

While the low interest rate environment and the home lending front to back book pricing impact remain substantial NIM headwinds for the sector, we expect the following tailwinds to be strong enough to largely offset these headwinds over the next six months: strong growth in at-call customer deposits; access to the RBA's Term Funding Facility (TFF); and downward pressure on savings deposit and term deposit rates.

We believe that FactSet consensus forecasts are also too pessimistic on the NIM front.

WBC remains our preferred pick despite final dividend uncertainty

WBC remains our preferred major bank, with one reason being that WBC is the only major bank where we believe the asset quality damage priced in is worse than the GFC experience.

However, as a result of potential write-downs/impairments of intangible assets and potential devaluation of the life insurance business in 4Q20, there is much uncertainty about WBC's final dividend for FY20 which we discuss in detail inside our full report (Morgans clients only).

CBA remains our least preferred major bank on valuation grounds.

Find out more

Morgans clients can access further analysis on the Banks in my full report: "Banks – Damage priced in is overdone (Part 2).

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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.

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