Why are Australia’s Regional Bank share prices collapsing?

Doubly bearish action

The race to the bottom continues.

In the last month alone, the Bank of Queensland (ASX: BOQ) and Bendigo Bank (ASX: BEN) share prices have been crushed by bearish investors, both falling around 40% in that period.

Today they continued to tumble: BEN fell 7.27% while BOQ collapsed close to 10%.

By the afternoon, the S&P/ASX 200 Financials Index had fallen 413 points, representing a staggering 9.59% decline.

In an attempt of sort of mend the chaos triggered by the current Coronavirus Crisis; on Sunday the US Fed cut interest rates to near zero and announced plans to kick-off a US$700 billion Quantitative Easing (QE) program.

In response to those extreme measures, some economists and investors are of the opinion that the Reserve Bank of Australia could follow a similar path.

According to the AFR, Andrew Boak, a Goldman Sachs economists posited this morning that the RBA would ‘lower the overnight cash rate target to 0.25 per cent and adopt QE-style 'yield curve control' measures.’

The RBA did indeed release a statement today, restating their openness to pursue a QE program of their own, through the purchase of government bonds.

However, no rate cut was announced.

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Bank of Queensland and Bendigo Bank share prices in focus

Turning back to BOQ and BEN, the outlook, amidst the current Coronavirus crisis is decisively not an ideal one.

For example, the broker Shaw and Partners notes that while the Bank of Queensland guided for lower cash earnings in FY20, the conditions under which that initial guidance was made have changed significantly.

Indeed, in the interim, ‘the impact of COVID-19 has increased and the cash rate has reduced by 25 bps. Consequently, our 2H20, FY21 and FY22 bad debt charges have increased by 40% and NIM is forecast to decline by an additional 2 bps p.a.,’ the broker said.

Speaking more broadly of the regionals, Shaw noted that:

‘The regional banks are reporting that the difference in the discount offered on new home loans is approximately 40 bps greater than older home loans. In comparison, CBA’s discount differential is approximately 25 bps.’

Overall, the outlook for either of the regionals is not a positive one, with the broker forecasting high single-digit (and low double-digit) earnings declines across both banks in the next few fiscal years.

For one, in FY20 and FY21, BEN is expected to see its earnings per share (EPS) fall by 7% and 12%, respectively. The Regional’s dividend yield however is forecast to remain high, at 6.8% in FY21.

BOQ isn’t expected to fare any better, across FY20 and FY20, Shaw sees EPS declines of 15% and 8% on the cards. Positively at least and like BEN, the Bank of Queensland is expected to maintain a healthy dividend yield of 6.7% in FY21.

Should the share prices of both banks keep dropping however, it is likely that investors won’t be paying much attention to elevated yields.