How new Covid-19 outbreaks could impact the Big Four Banks

Risk re-emerges as Victorian Covid-19 cases spike

With the sector looking oversold in March, the big four banks have rallied strongly over the last three months – as concerns from equity investors and traders, over the coronavirus pandemic abate, to a degree. In that period Commonwealth Bank (CBA) has rallied 25.34%, Westpac (WBC) has gained 18.39%, National Australia Bank (NAB) has added 15.97% and Australia and New Zealand Banking Group (ANZ) has risen 16.18%.

In spite of that, uncertainty remains – with the Australian Prudential Regulation Authority (APRA) recently issuing regulatory guidance to the big four banks regarding the further extension of loan holidays. The banks initially marketed these loan deferrals as running for up to six months, though APRA’s recent directive provides guidance for upto four month extensions.

Elsewhere, with Victoria witnessing an aggressive spike in coronavirus cases over the last few weeks, analysts and commentators have begun to worry that the banks, as well as the economy as a whole, may not be set to recover as smoothly as previously hoped. At the time of writing Victoria had 7,125 active coronavirus cases, making up over half of the total cases in Australia.

Mirroring this to a degree, over the last month the rally in the share prices of the banks have taken a hit – with only CBA trading higher.

ANZ, CBA, Westpac and NAB dividends expected to remain subdued

This state-specific spike in coronavirus cases has led to Citibank, previously ‘uber-bullish’ on the banks, to rethink how they view the risk profile of the sector. Broadly speaking, analysts from the US-based investment bank argued that the emergence of rolling coronavirus waves would likely lead to increased loan deferments; potentially create solvency issues for smaller-sized lenders, and drag on the resumption of dividend payments.

Ultimately, Citi’s analysts went on to argue that they now forecast that the sector’s revenue growth will likely be weaker that previously thought; while arguing that dividend payments would likely resume in the fourth quarter of FY20, though at a significantly reduced 40% payout ratio, in a move that would push capital to ‘stratospheric levels’.

‘We have lowered our 2H20 and FY21 dividend forecasts as we expect rolling lockdown will result in a much slower return to normalised payout ratio of ~75%, as the regulators would continue to want core equity capital to be built across the system,’ Citi analysts said in a note.

Looking at the investment bank’s dividend forecasts for the majors in FY21, it is expected that ANZ will pay full-year dividends totalling 110 cents per share; CBA 315 cents per share; NAB 110 cents per share; and WBC 110 cents per share.

Despite lowering their dividend forecasts of the big four, Citi analysts remain optimistic on the sector overall – at least in terms of ratings – retaining Buy recommendations to ANZ, WBC, NAB and BOQ.

By comparison, Citi has Neutral ratings on CBA and BEN.

How to trade bank stocks

Do you think the banks will flourish or flounder in the current economic environment? Trade accordingly. For example, you can trade any of the bank stocks we have discussed today – both LONG and SHORT – through IG’s world-class trading platform now.

For example, to buy (long) or sell (short) ANZ with CFDs, follow these simple steps:

1. Create an IG Trading Account or log in to your existing account
2. Enter ‘ANZ’ in the search bar and select it
3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade