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Citi remains bullish on the banks following APRA loan holiday update

We examine APRA’s recent directive on loan deferments, as well as one investment bank’s current outlook on the big four.

A problematic period for the big four

Australian banks have faced significant pressure from shareholders in recent times – as the fallout from the Hayne Royal Commission lingers, interest rates remain at historic lows and the coronavirus pandemic sees the big four booking billions of dollars’ worth of impairment charges.

Illustrating this weakness – and the investment community’s general aversion to the banking sector in recent times – over the last year Westpac Banking Corporation (WBC), the National Australia Bank (NAB) and the Australia and New Zealand Banking Group (ANZ) have all seen their share prices fall in excess of 30%. The Commonwealth Bank of Australia (CBA), by comparison, has been spared from that carnage to a degree – dropping just 13% in that time.

The loan holiday extension

On Wednesday, the Australian Prudential Regulation Authority (APRA) provided updated regulatory guidance for authorised deposit taking institutions (ADIs) on accepting extended customer loan deferral requests.

In response to this announcement, the APRA Chair, Wayne Byre argued that ‘These measures are designed to incentivise ADIs to continue to support their customers through an extended period of uncertainty, while at the same time facilitating the restructure of eligible loans in a measured and timely manner.’

For reference, in March, it was announced that individuals – adversely impacted by the coronavirus pandemic – could have their loan repayments deferred by upto six months. The majority of the individuals taking up these ‘loan holidays’ held small business loans or home loans.

The regulator noted that it expected these new extensions – which cover loan deferrals spanning an additional four months – would be granted by the banks on a case-by-case basis.

Though the big four traded down on Wednesday, Westpac, ANZ and NAB traded modestly higher on Thursday. On Friday the banks all opened lower.

ANZ, CBA, WBC and NAB share prices: dividends remain a focal point

Elsewhere, in an interesting move from the regulator, APRA also announced that:

‘Where an ADI restructures an affected borrower’s facilities before 31 March 2021 with a view to putting the borrower on a sustainable financial footing, the loan may continue to be regarded as a performing loan for capital and regulatory reporting purposes.’

Analysts from Citi, who have been constructive on the sector in recent times, remained upbeat on the prospects of Australian banks, describing the regulator’s treatment of ‘performing loans’ as a distinct positive for the sector.

‘This announcement is incrementally positive to our view that milder than expected loan losses will drive higher than expected dividends out to FY22. We continue to expect stock prices to move higher on the attractiveness of their dividend yields,’ Citi analysts said.

Citi currently has Buy ratings on all of the big four banks – with the investment bank's order of preference, from most preferred to least preferred, being: NAB, WBC, ANZ and CBA.

The investment bank also has a positive outlook on the regionals, retaining Buy ratings on both Bendigo and Adelaide Bank (BEN) and the Bank of Queensland (BOQ).

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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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