NAB back to $10-12?, page-146

In a recent scenario plan for the recovery, Credit Suisse estimated a potential ROE range for the banks post-pandemic of between 7 per cent and 13 per cent. Evans & Partners expects 10 per cent; UBS says it might be 9 per cent. Over the latest half year, big provisions raised to buffer banks from the impact of the crisis saw ROE plunge by an average of 5.63 percentage points from 12 per cent at the first half of 2019 to just 6.3 per cent for this half year.

Given their strong balance sheets and liquidity, and the swift government support of the economy in March, some of the prevailing pessimism about bank stocks has been pared back in recent weeks. UBS analyst Jonathan Mott upgraded his outlook for the economy on June 4, saying the likelihood of a further deterioration in asset quality requiring more capital, which could have triggered dilutive capital raisings, had reduced materially.

But the short-term fate of the banks still largely depends on the willingness of policy makers and regulators to extend relief to sectors slow to recover from the crisis and to provide leniency to the banks in the treatment of deferred loans. "The lower reliance on JobKeeper than government expectations also provides some flexibility for further targeted stimulus as current packages, loan deferrals and rental relief expires in October," Mr Mott said.

Macquarie said it is unlikely banks will return to the levels they were trading at before COVID-19 unless the rest of the market continues to re-rate or the cash rate goes back to around 1.5 per cent.

"Current operating conditions are still far from normal and given significant uncertainties we believe a discount is warranted," Macquarie analyst Victor German said.

But he reckons that banks’ sustainable return on capital will help them to maintain payout ratios of around 65 per cent to 75 per cent, representing a sustainable dividend yield of between 4 per cent and 6 per cent when conditions normalise and capital targets are met.