Morningstar analysts have forecast a “troubling” outlook for the banks ahead, expecting the rise of unemployment and business closures will hit the major financial institutions with loan losses.
While Morningstar does not believe the banks’ revenue will be materially impacted, it has increased its loss assumption to around 30 basis points of loans in fiscal 2020 and fiscal 2021.
In contrast, the last five years saw an average of just 13 basis points, or a 124 per cent increase, the analysis noted.
Earnings predictions for the big four have been reduced between 5 per cent to 10 per cent, while dividend forecasts have also been reduced by up to 17 per cent on the assumption payout ratios will fall.
However, the report has pointed to CBA as an exception, forecasting a 7 per cent fall to $4 per share in fiscal 2020, before falling to $3.50 in 2021.
But if losses as a percentage of gross loans were to increase to between 40 and 80 basis points, Morningstar has estimated earnings and dividends from the banks could fall by a further 10 per cent to 45 per cent in fiscal 2020. During the GFC, the same ratio on average rocketed to around 75 basis points.
While central banks across the UK, EU and New Zealand have ordered the banks to freeze payment of dividends during the coronavirus crisis, the analysts do not expect Australia to follow.
“Australian banks have capital well in excess of minimum requirements, and will be mindful of the additional strain which be placed on retirees reliant on dividend income in this low cash environment,” Morningstar stated.
“These are unprecedented times though and actions we previously would have given basically zero per cent chance of occurring now need to be considered as possible.”
But while the flow of new mortgages will be lower, the bank loan books are not expected to shrink in the next few years.
“Households deferring payments, moving to minimum monthly repayments (based on current cash rate) and drawdown of advanced payments and cash in offset accounts will limit the impact on the mortgage book,” the analysis said.
“As it stands today, landlords appear to be the biggest losers. For an individual with a $500,000 home loan variable interest rate of 3 per cent, who is forced to defer for six months, their loan balance increases by $7,500 or 1.5 per cent. Interest will be payable on that interest.
“Despite a slump in business investment, we expect businesses drawing down on existing facilities and businesses taking on additional working capital lifelines to work through the next six months will underpin 3.5 per cent loan growth across corporates and SMEs.”
Net interest margins are expected to fall from an average of 1.95 per cent in fiscal 2019 to 1.85 per cent for fiscal 2020 and 1.78 per cent in fiscal 2021.
But Morningstar has admitted its short-term forecasts may prove “too optimistic” if economic recovery is slower than expected.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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