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Are banking investors overly optimistic?
The Australian banking sector continues to face various headwinds, with a large investment bank questioning if consensus is too optimistic for the big four banks.
Are banking investors overly optimistic?
The Australian banking sector continues to face various headwinds, with a large investment bank questioning if consensus is too optimistic for the big four banks.
According to analysis by UBS, the banking sector is currently faced with low credit demand from both consumers and businesses as both look to tighten their belts during the COVID-19 pandemic.
The findings showed that during the last 160 years, when a financial crisis happens, businesses slow down credit in preparation for the next business cycle.
“These events are often associated with a turning point in societal gearing, with the economy entering a deleveraging phase (falling business and total private debt to GDP),” said UBS analyst Jonathan Mott.
“From the analysis we have conducted, we believe consensus may be pricing in too much of a recovery in business credit growth to get to current volume growth estimates. We estimate the market is anticipating growth of 4-5 per cent pa or the next two years, adding 2-3 per cent to growth pa.”
The UBS analysis showed that business credit changes are coming at the same time as consumers are spending less.
“We believe the potential for negative business credit growth provides a further headwind, especially at a time when residential investment property and personal unsecured credit outstanding is already contracting,” Mr Mott said.
However, UBS still remains positive on the Australian banking sector but has told investors to keep an eye out for changes in SME lending.
“We are in an information void given policy stimulus and loan deferrals. While we expect credit charges to fall near term despite Melbourne’s second lockdown, we anticipate a renewed wave of charges in FY21E as the full impact of the recession is felt.
“This leads to a W-shaped earnings recovery. We believe the linchpin to the banks’ performance (and broader economy) is the SMEs and the level of ongoing government policy stimulus,” Mr Mott said.
The analysis follows the Australian Prudential Regulation Authority (APRA) updating its capital management guidance for banks and insurers, in particular easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19.
APRA chair Wayne Byres said the updated guidance balanced the need for banks and insurers to keep supporting households and businesses, while also maintaining a prudent approach in the face of a very sharp and severe economic contraction.
APRA’s letter to ADIs also highlights the importance of utilising current capital buffers to absorb losses and meet the needs of customers.
“The years spent building up the capital strength of Australia’s banking sector to historical highs have been precisely for a time such as this. Further, APRA is committed to ensuring any rebuild of capital buffers, if required, will be conducted in an orderly manner,” Mr Byres said.
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