Bank shares smashed as Australia teeters on brink of recession // Motley Fool Australia

Bank shares smashed as Australia teeters on brink of recession // Motley Fool Australia

The share prices of banks have been sent lower with worries about an Australian recession and bad debts.

The Commonwealth Bank of Australia (ASX: CBA) share price is down 2.6% today and down 16% over two weeks.

The share prices of banks have been sent lower with worries about an Australian recession and bad debts.

The Commonwealth Bank of Australia (ASX: CBA) share price is down 2.6% today and down 16% over two weeks.

The Westpac Banking Corp (ASX: WBC) share price is down 2.6% today and down 16% over two weeks.

The Australia and New Zealand Banking Group (ASX: ANZ) share price is down 3.5% today and down 18% over two weeks.

The National Australia Bank Ltd (ASX: NAB) share price is down 4.5% today and down 19% over the past two weeks.

As far as blue chip banks go, this is a painful day.

Why are big banks being punished? There are two key reasons, due to flow-on effects from the coronavirus:

Recession

According to reporting by the Australian Financial Review, credit rating agency Standard and Poors (S&P) has said that several Asian economies will enter or flirt with recession, including Australia. Those other places in danger are Hong Kong, Japan, South Korea, Singapore and Thailand.

It only takes two quarters of GDP declines to be called a recession, whether it’s two falls of 0.1% or two falls of 1%.

The S&P said a fall of the GDP could lead to unemployment rising and underlying inflation to fall. It would also mean that the RBA could do another interest rate cut, be close to quantitative easing and there may be stimulus by the Australia government to support the hardest-hit industries.

Bad debts

The AFR also reported that some analysts think that bank bad and doubtful debt could balloon by 30% to 50% with economic activity slowing down sharply.

The major banks passed on the full RBA cut, which will eat into their net interest margins (NIMs). Investors are also concerned that the banks will come under political pressure to be easy on borrowers who can’t repay because of coronavirus cashflow problems.

NAB head of business banking Anthony Healy said to the AFR that COVID-19 “is already disrupting trade flows, and tourism numbers – which means less demand for accommodation, food and beverages.” He also said that NAB is “already talking to our customers about the help we can offer them, such as deferring business loan repayments for up to three months or restructuring their loans.”

This is the danger for banks. They may be quite profitable in a normal year, but earning a 2% return on your loans isn’t much comfort if you have to write off 100% of the loan.

Are banks a buy?

Sometimes the media likes to run with overly negative stories, but I think there is a genuine worry that this could turn into a recession and cause problems for cashflow for individuals and smaller businesses. Indeed it already is. 

Banks are certainly cheaper than they were before. But I don’t think that a share price fall in the teens warrants jumping yet, particularly when a bank like NAB itself is acknowledging that it’s facing issues.

Sadly, that is the reality of the coronavirus. It’s affecting a lot of businesses and the major banks are exposed to a lot of them – credit makes the economy go round. I don’t think the banks are a buy today, and I’m a bit worried for them.

That’s why I’d only want to invest in high-quality defensive shares at the moment, like this rock-solid dividend idea.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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