In a report by UBS, the investment bank explains why they are optimistic about the major banks in the short term.

The big four banks are staples of many investors’ portfolios, with stronger than expected economic data coming out in recent weeks likely to aid the major banks. 

While highlighting the big four have a long way to go before being out of the woods, UBS analyst Jonathan Mott explained banks’ investors have largely focused on the banking sector’s headwinds.

“The banks have traded in a relatively tight range since March. They have missed out on the broader market rally, underperforming by 19 per cent over the last three months. We believe further catch-up is likely near term as the economy reopens,” Mr Mott said.

This does not mean the banking sector does not carry significant risks.

Australian banks are large, highly leveraged financial institutions operating across a number of markets, and as such are subject to the risk of changes in the general business and economic conditions within these markets.   

A change in these conditions could include changes in interest rates, inflation, unemployment, monetary supply, exogenous shock, changes  in foreign exchange rates, and the health of the general economy.

The banks also face the risk of regulatory changes and increased competition which could affect the profitability of the sector. A key risk  that financial institutions face is associated with extending credit to other parties.

One such risk currently facing the banking sector is changing government policy which is likely to put a strain on the banks’ final quarter.

“However, we estimate that 4Q20E is likely to be the most challenging period for the banks, with around  $100 billion in policy support coming to an end in September,” Mr Mott continued. 

UBS explained that 3.5 million people are likely to be off JobKeeper by the end of September as well as a further 1.6 million on JobSeeker being reduced to previous levels.

They also highlight the early access to superannuation, which has added $20 billion in short-term relief, will not occur, while loan deferrals on $220 billion and SME loans will end, which will act as a headwind against the banking sector. 

The investment bank also highlights potential tailwinds for the banking industry as the government looks to support house prices through policies that could potentially benefit first home buyers. 

“Overall, we are more optimistic on the banks near term; however, the medium-term challenges for the sector remain. Our order of preference is: ANZ, WBC, NAB and CBA,” Mr Mott concluded.