Banks & General Insurers

APRA notified ADIs and insurers back in April of the expectation “to limit discretionary capital distributions in the months ahead, to ensure that they instead use buffers and maintain capacity to continue to lend and underwrite insurance”.

COVID-19 has come with higher credit impairment charges that have also forced the banks to acquiesce to APRA’s wishes for either deferred or materially lower dividends. However, underlying performance in 1H20 continues to be sound and balance sheets are much stronger than ever before.

The majority of the banks had a good reporting season in the period ended 31 December 2019. However, all this is now history and what lies ahead in the next 12-24 months will be of more concern as there appears to be no escaping COVID-19 for now.

Following the RBA’s decision to lower the cash rate by 25bp to 0.50%, we have decided to rebase sector earnings expectations. This is in anticipation of slowing home and business lending growth and another 25bp rate cut linked to COVID-19.

Our 2020 top three picks, MQG, SUN and IAG, possess strong risk management capabilities and defensive qualities including healthy balance sheets and surplus capital that could be returned to shareholders.