Banks fleeced by the RBA again, new headwinds emerging

Following the RBA’s decision to lower the cash rate by 25bp to 0.50%, we have decided to rebase sector earnings expectations in this note.  This is in anticipation of slowing home and business lending growth and another 25bp rate cut perhaps in April linked to COVID-19.  We use two methods to determine the earnings impact of the rate cuts.  The first relies on extrapolated CANSTAR estimates to assess net interest income (NII) foregone while the second is based on actual bank SVR reductions that are then doubled.  Further assuming potentially lower deposit and wholesale funding rates and taking the average NII foregone across the above methodologies, FY21 cash earnings impacts are estimated as follows: (1) ANZ -4%; (2) CBA -7%; (3) NAB -4%; (4) WBC -8%; (5) SUN bank -17%, Group -5%; (6) BEN -7%; and (7) BOQ -5%.

In addition to downward NII and NIM revisions, lending volume growth will also likely be impacted.  In our CBA note of 3 March, we anticipated 1% lower home and business lending growth to 3% p.a. flowing from lower GDP – the assumption being a long run credit multiplier of 2x GDP and that GDP is reduced by 0.5%.  At the Senate estimates economics committee meeting yesterday, the RBA lowered GDP by 0.5% – the impact largely coming from tourism and education – and this is consistent with the OECD’s current assessment for the country.  We have also determined relative bank susceptibility to geographic and industry segments that may be impacted by COVID-19 as well as other outstanding risks.  Supported by stronger CET1 ratios, we believe MQG, SUN, ANZ and CBA are most resilient in sustaining dividends at current levels.

MQG still our most preferred bank

With the exception of MQG, earnings estimates across the forecast horizon are lowered by 7% on average for the majors and by 10% on average for the regionals (not surprising for the latter given their lack of scale) and price target reductions are similar in magnitude.  Ratings for NAB and BOQ are lowered from Buy to Hold based on higher operating risk perceptions.  MQG’s $158.00 price target and Buy rating are unchanged and the company remains the top pick across our coverage universe.

LEARN MORE

If you’re interested in learning about these investment opportunities in the context of your portfolio, get in touch with your Bell Potter adviser. Alternatively, call 1300 023 557 to organise an obligation free discussion with one of our experienced advisers.

Authored by TS Lim – Bank/Insurance Analyst at Bell Potter Securities, 5 March 2020
Important Disclaimer—This may affect your legal rights: Because this document has been prepared without consideration of any specific client’s financial situation, particular needs and investment objectives, a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the proper authority of such licensee, who has provided you with this report by arrangement with Bell Potter Securities Limited) should be consulted before any investment decision is made. While this document is based on the information from sources which are considered reliable, Bell Potter Securities Limited, its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility to inform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document. This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. This is general investment advice only and does not constitute advice to any person.
Disclosure of Interest: Bell Potter Securities Limited receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. Bell Potter Securities and its associates may hold shares in the companies recommended.
Disclosure: Bell Potter Securities acted as Co-Manager in the following transactions and received fees for the services: CBA PERLS XII Capital Notes (Oct 2019), MQG Capital Notes 2 (Feb 2020) and NAB Capital Notes 4 (Feb 2020).