Why J.P. Morgan just slashed the Big Four Banks' earnings outlook

RBA slashes rates

Like clock-work, the big four banks – ANZ, CBA, Westpac and NAB – all saw their stock sold-off at a rapid click late-yesterday and today.

Indeed, if the emergence of the Coronavirus (COVID-19) gave investors an impetus to dump risk assets, the 25 basis point cut from the RBA yesterday, which took the official cash rate to 0.50% – handed them another potential reason to sell-down their bank positions.

Surveying the damage, by late afternoon the ANZ share price was down as much as 3.67%, Westpac had slumped 3.12%, NAB had fallen 3.44%, while CBA was the least impacted in percentage terms, dropping 2.73%.

In contrast to those figures, J.P. Morgan noted that ‘CBA stands out as the most impacted given its higher % of interest rate insensitive deposits.’

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ANZ, CBA, Westpac and NAB share prices in focus

In response to the RBA’s rate cut, J.P. Morgan and UBS downgraded their earnings outlook across the board for the big four.

J.P. Morgan said:

‘We estimate the rate cut will reduce cash NPAT by ~3%-4% for the majors over the next 3-5yrs. However to reflect the probability of a further cut we have reduced FY22 forecasts by more than this (~5% on avg).’

Other assumptions that the investment bank has changed off the back of the RBA’s rate cut include: a reduction in bank Net Interest Rate Margins (NIMs), higher operating expenses for NAB, reduced buy-back assumptions for CBA and an increased potential dividend cut for Westpac. CBA may also cut its dividend, the investment bank warned, saying that payout ratios are stretched at current levels.

As a consequence of all this, J.P. Morgan lowered its price targets across all of the big four. The investment bank currently thinks ANZ's fair value stands at $25.25, CBA at $74.20, NAB at $28.00 and Westpac at $23.40.

UBS took a comparably cautious tone today, cutting EPS forecasts by 1.6% in FY20e and 3.2% in FY21e, across the sector.

The investment bank further noted that ‘with rates likely to remain near zero for the foreseeable future, sector ROE is likely to fall towards single-digit levels, placing further pressure on capital generation and dividends.’

Ultimately, UBS lowered their share price target on ANZ to $25.50 (-3.9%), CBA to $71.00 (-5.3%) and Westpac to $23.50 (-4.1%). UBS’s price target on NAB remained unchanged at $25.00 per share.

More cuts to come?

Mind you, the cuts are not expected to stop here, with J.P. Morgan’s economists predicting that the RBA will cut rates by a further 25 basis points in April.

Moreover, because ‘the RBA’s effective lower bound is said to be 25bps, this raises the possibility of Quantitative Easing,’ the investment bank added.

Watch this space

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