Westpac. Looking forward, page-13

my thoughts going forward:
future bank profits will be much harder to generate than historical profits.
a) banks will still be required to hold heavy capital buffers which will constrain lending as a % of capital (refer to the long term increase in CET1 ratio). This is being incorporated inside the Basil requirements across the world and has been going on for a decade post GFC
b) unless you expect RBA rates to go back up to 2% in the next two years, then bank net interest margins are going to get crunched.
c) look at BOTH historical bad debt provisions and loss reserves, both were at historical lows. I estimate a minimum of 3 half years of significant increases to the provisions to bring the loss reserves up to a level required for these uncertain times.
d) if central bankers take interest rates negative this risk will really slam the brakes on bank profits.


Yes I recently bought ANZ, WBC and NAB over the last month, but I am under no illusions that bank share prices could fall significantly further from current levels. So my positions are of a modest size whereby I can easily top up if prices drop significantly from current prices. Under one 'what if' analysis I did for for WBC, if the market is underestimated bad debt provisioning or if the expected higher provisioning lasts persists into FY2022, then actually the medium term fair value of Westpac is only around $12.

All I am saying is be verycareful extrapolating historical numbers into the future.