excerpt 24th Mar AFR "Why the market has got it wrong on the...

excerpt 24th Mar AFR "Why the market has got it wrong on the banks"
" ........Citi analyst Brendan Sproules, who argues that the banks are better positioned entering the pandemic than they were for the GFC, and says that while margins, earnings and dividends are heading south in the 2020 and financials year, profits can bounce back from there as the crisis creates something the banks haven’t seen in a while – growth. Sproules says the 45 per cent fall in bank stocks in the last month sees many now trading below book value – that’s the market’s way of implying they don’t have enough capital to meet the expected impact of the pandemic.....
But while there’s no doubt the impact of this crisis will be severe, there are a number of reasons it is very different to the GFC, which created an existential threat for some banks. For a start, Sproules’ base case is that the pandemic is a transitory crisis that will last nine months, and not the 18 months that the GFC raged for.......For example, they are holding double the amount of tier 1 capital they had at the start of the GFC. So strong is their position that the prudential regulator won’t be rigid about forcing the banks to maintain “unquestionably strong” capital levels; this will mean the banks don’t need to raise capital this time around. A wave of bad debts is coming, with Sproules tipping a three-fold increase in bad debt levels – even if the federal government’s stimulus measures for SMEs and the relaxation of insolvency laws means it will take as much as 12 months for the banks to get a handle on just how ugly things are.But even then, the shape of this crisis is different. In the GFC, it was highly geared sectors such as property that were hardest hit. This time around it will be people focused sectors such as hospitality, retail and education that get smashed.These sectors tend to have lower debt levels, leading Citi to estimate bad debts could rise to about 1.2 per cent of non-housing loans, well below the 1.8 per cent seen in the GFC. On housing loans, Sproules is relatively relaxed. Bad debts will rise four-fold from current levels, but these are at historic lows. House prices will fall, but not like the 40 per cent drops we saw in the GFC. And significant borrower equity in mortgages should keep bank-enforced property sales to a minimum, and housing bad debts under control. While these are the key differences between the 2020 pandemic and the GFC, the experience from 2008-09 is instructive about the way businesses and households will react, and why that will drive growth. Demand for credit will obviously rise as businesses look to secure funding – and experience says these businesses will flock to the major banks for reasons of perceived safety. Demand for deposits will rise too, as businesses and households reduce spending and try to make sure they have enough cash on hand to survive an extended period of pain. Growth in loans and deposits will flow through to net interest margins (NIM) - the difference between the rate offered to depositors and borrowers - that have been so closely watched in recent years."