Banks cop earnings downgrades
Bank stocks came under disproportionate selling pressure on Wednesday as analysts priced in the negative earnings impacts of looming loan relief to stressed business borrowers and the prospect of quantitative easing by the Reserve Bank.
Political pressure on the banking sector to deliver relief to troubled business borrowers has triggered concern that banks face a blow out in non-performing loans this year that would erode profits.
The four major banks have already announced a raft of relief measures for business borrowers that include fee waivers and suspension of interest payments, but institutional investors now believe that the Morrison Government is pushing for lenders to forego penalty interest on loans in default and other concessions that might severely erode returns.
The increasingly bleak outlook on the sector was reflected in relative share price movements on the ASX on Wednesday.
While the benchmark S&P ASX 200 index closed down 3.6 per cent, major bank shares posted losses of between 5 and 6.6 per cent.
The biggest losers were the country's largest lenders to small and medium businesses: CBA was down 6.6 per cent and NAB down 6.2 per cent.
The banking sector's willingness to acquiesce to demands from the Morrison government is a corollary of its poor moral standing in the Australian community.
It means that shareholders and depositors will be forced to absorb sharply lower returns in the current financial year as banks sacrifice revenue to rebuild their reputations.
Major bank's deposits bases will be feeling the strain, with most credit unions and challenger banks offering 12-month fixed rates that are at least 50 per cent higher than the market leaders.
However, broking analysts yesterday highlighted another factor weighing on the sector's earnings outlook that is likely to erode shareholder returns further.
The likelihood of unconventional monetary policy measures such as quantitative easing has sparked a wave of earnings downgrades for all listed banks.
Evans & Partners bank analyst Matthew Wilson yesterday slashed earnings and dividends forecasts for the major banks, arguing that the prospect of the RBA stepping into the market as an aggressive buyer of government bonds will undermine lending margins in a zero rate environment.
"Whilst the RBA clearly acknowledges the negative side effects of unconventional policy, they seem destined regardless to follow other central banks past the point of no return," Wilson said in a report to investors.
The E&P analyst has downgraded his earnings and dividend forecasts for each of the majors, with NAB shareholders expected to be hit with a 4 per cent cut to the $1.66 total dividend that was paid last year.