Could banks emerge from the pandemic with a better outlook than expected?

Banks Australia pandemic COVID-19 outlook stimulus loans cash profit

Of the many share market gyrations we have seen since the COVID-19 pandemic began, some of the most dramatic have been Australia’s big four banks.

Bank share prices have absolutely plunged, with NAB’s initial 49% dip the most impressive but all of the big four were down sharply.

Since that initial plunge, there have been further sharp rises and falls as investors adjusted to the news of two emergency official interest rate cuts, a likely suspension or cut to the bank dividends for the duration of the crisis or even longer, six month home and business loan repayment “holidays’’ and a potential large jump in bad loans due to a massive rise in unemployment and business failures.

That is a lot of news to process and there have been many wild rides up and down for the bank’s share prices but among all of the bad news, there is still a possibility that the banks will emerge from this crisis in better shape than many might expect.

Naturally that will depend on the progress or otherwise made in containing the pandemic which at this stage is very difficult to estimate.

While there are sure to be many bumps in the road between now and when the pandemic crisis winds down, here are some of the reasons why the banks may perform better than expected.

Stimulus payments

Since the crisis started there has been an astonishing array of stimulus payments to support jobs, businesses and households get through the unplanned closure of many jobs and businesses.

Together with Reserve Bank’s emergency lending package the total stimulus being pumped into the Australian economy is more than $318 billion, which roughly equals 16% of GDP.

A lot of that stimulus will directly and indirectly wash through the banks in the form of new lending and repayments from businesses and households that otherwise might not have been made.

In effect, the banks are the arms and the legs of the RBA’s stimulus efforts and they will have huge amounts of cash that can be loaned out with healthy margins.

Pausing or reducing dividends will also help to keep the banks cashed up.

A lot will depend on the length of the COVID-19 shutdown, with the results obviously a lot better if the shutdown is shorter rather than longer.

In short, while there is sure to be an impact on the banks through a rise in bad loans of various kinds, the massive stimulus program should be a big help in keeping their profitability stronger than it would have been.

Longer and more lucrative loans

A lot has been made of the six-month loan repayment “holidays’’ that the banks are allowing for those caught up in the crisis but it should be remembered that during all of these loan adjustments the bank’s interest clock never stops ticking.

Apart from those whose loans eventually turn bad, the remainder of the businesses and households that emerge after the six month “holiday’’ will find one of two unpleasant realities – higher monthly loan repayments or a longer loan term.

In effect, by granting a six-month holiday, the banks have locked in their customers for potentially several extra years and much higher interest repayments.

Alternatively, loan repayments can go up so that the now higher loan can be repaid over the existing loan term.

While the loan holidays are welcome for those who suddenly find themselves without income or with restricted income, they are not an act of charity.

Still, they are vastly superior to the Great Depression years when both banks and households went broke and lost their livelihoods due to increased austerity rather than stimulus payments.

We know now that it is vastly better for everybody if we can keep people in jobs and their houses rather than see everyone disappear down a plughole of bad debts and mass homelessness.

Profitability should continue

One of the reasons the big banks have been so sought after by investors is that they offer strong financial returns and in particular, high dividend yields.

Indeed, even now with the prospects of suspended or reduced dividends, you are more likely to get a higher yield by investing in the banks than going into one and taking out a term deposit.

While nobody can tell the future, with the banks enjoying solid support from the Reserve Bank, they are also likely to benefit from the “get with the strength’’ effect that followed the most recent similar economic shock, the GFC.

Customers are more likely to flock to the largest and seemingly most stable financial institutions as part of a general flight to quality during times of crisis.

While it is difficult to know exactly how the world will look like on the other side of the COVID-19 pandemic, it is reasonable to assume that the banks will emerge from this crisis in fairly good shape.

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