Fear of QE hammers bank shares
Fears that bank profits will be crunched by "unconventional" monetary policies that could be unleashed by the Reserve Bank have hammered the big four's shares, as investors also fret over the risk of a wave of defaults caused by coronavirus.
After a senior RBA official on Wednesday reiterated there were scenarios when it would consider an unconventional stimulus measure known as "quantitative easing", analysts warned of the hit to bank profits from such a move.
The big four’s shares fell sharply on Wednesday amid concerns profit margins will be squeezed. Credit:Ryan Stuart
In another turbulent day of trading on the sharemarket, Commonwealth Bank shares plunged 6.6 per cent to $68.50, National Australia Bank fell 6.3 per cent to $19.78, ANZ Bank declined 5.5 per cent to $19.96 and Westpac shares dropped 5.3 per cent to $19.46. The benchmark S&P/ASX 200 lost 3.7 per cent to 5725.9, its lowest close since January 2009.
CLSA analyst Brian Johnson emphasised that banks were in "much better shape" today than during the 2008 global financial crisis, but said pressure on margins had emerged as a key concern for investors. Net interest margins, which compare interest rates on loans with banks' funding costs, are dragged down by falling rates because banks struggle to offset the decline in lending rates by cutting deposit rates by the same amount.
Quantitative easing or QE, which RBA deputy governor Guy Debelle on Wednesday said would need to be considered under some scenarios, would be a further blow to banks' bottom lines.
QE is intended to cause a flatter yield curve in bond markets — meaning long-term interest rates would be pushed even lower. Mr Johnson said this would limit the effectiveness of complex instruments used by banks known as "replicating portfolios," which are aimed at hedging against lower interest rates.
Philip Lowe, like Caesar in 49 BC, is camped on the banks of the Rubicon river.
"We are getting closer to QE in Australia," Mr Johnson said. "The whole yield curve flattens, replicating portfolios get smashed and margins get smoked."
Evans and Partners analyst Matthew Wilson cut his valuations of the major banks by 6 per cent to 9 per cent, citing the hit to margins from lower rates and the effects of QE.
"[RBA governor] Philip Lowe, like Caesar in 49 BC, is camped on the banks of the Rubicon river. In the next month or so we expect the RBA to invoke quantitative easing, cross the Rubicon, and pass the point of no return for the Australian Banking industry," Mr Wilson wrote in a note clients.
The concern over margins comes as markets are also on edge over the impact of the coronavirus, with chief executives meeting with Treasurer Josh Frydenberg on Wednesday and vowing to support the economy during a coming downturn.
Atlas Funds Management's chief investment officer Hugh Dive said concerns that banks' bad debt charges would rise from record low levels was also driving the sector's shares lower in "extremely choppy" trading. "There's a fear going around that bad debts are going to spike, so profits will be under pressure," Mr Dive said. Even so, he pointed out that many mortgage customers had significant funds to draw on in their offset accounts, which would give these borrowers a buffer against default if they lose their jobs.
Bell Potter analyst TS Lim said bank shares may also have been negatively impacted by a Standard & Poor's report that said Australia faced a looming recession as defined by two quarters in a row of negative growth. S&P affirmed the federal government's AAA rating.
Morningstar analyst Nathan Zaia said uncertainty over the economic effects of the virus was the key reason for volatility in bank share prices. "The question really is how big an issue is this," he said.
Mr Zaia said that if bank earnings do fall as a result of the crisis, most of the major banks' dividends could also come under pressure, except for CBA, which has excess capital after a series of asset sales.
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