Why the Big Four Banks have seen their share prices plummet again

As the US Fed cut rates close to zero, a number of economists and investors are now expecting that the Reserve Bank of Australia could follow a similar path.

Interest rates go to zero

Markets across the globe continue to deteriorate at a rapid click.

In an emergency move on Sunday, the US Federal Reserve cut interest rates close to zero and announced a US$700 billion quantitative easing (QE) program.

US interest rates now stand at a range of 0% to 0.25%.

The Fed also announced a QE program that would include the purchase of US$500 billion of Treasury Securities as well as US$200 billion of Mortgage Backed Securities (MBS).

In light of this move, the Fed further said:

‘The Coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States.’

It was also added that the ‘the Federal Reserve is prepared to use its full range of tools to support the flows of credit to households and businesses.’

Though interest rate cuts often mobilise equity investors, they did no such thing here amidst the deep uncertainty surrounding the economic, social and health impact entailed by the Coronavirus crisis. Instead, US Futures dropped sharply, with DOW futures falling as much as 1,000 points in response.

And when Australian markets opened this morning there was comparable carnage: the ASX 200 itself collapsed 385 points in the first thirty minutes of trade. All sectors were in the red, bar consumer staples, before noon.

Speculation now mounts as to whether the Reserve Bank of Australia (RBA) will follow the US Fed and cut rates to zero or close to it. The Australian Financial Review this morning noted that:

‘The RBA may soon opt for an unscheduled interest rate cut and unconventional stimulus measures according to market economists and investors.’

Finally, and according to NAB’s Chief Economist, Alan Oster:

‘Central banks around the world continue to react with emergency interest rate cuts to assist with the shock to demand arising from the spread of the COVID-19 virus, with necessary public health containment efforts coming at a substantial cost.’

ANZ, CBA, Westpac and NAB share prices: banking on the future

Bank stocks were hit particularly hard today, with the S&P/ASX 200 Financial Index falling 6.7% to 4,402 points, in the first hour of trade.

In the first thirty minutes of the session, ANZ’s share price plummeted 8.24% to $17.25 per share, CBA dropped 6.72%, NAB fell a staggering 7.01% and Westpac dove 7.01% to $16.85 per share.

Not an ideal start to the week, that's for sure.

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Analyst musings: don't focus on rates

Though many in the markets spent much of last year focusing on how lower interest rates would impact bank profitability, that problem seems somewhat less pronounced in the current environment of panic and calamity, with Shaw and Partners last week positing:

‘While future NIM pressure is probably overstated, the threat to asset quality from a slowing global economy may not be. The bad debt charge forecasts for each of the major banks have been increased by $300M p.a.’

For example, on a more granular level and in the case of Westpac Banking Corporation, Shaw and Partners has increased their bad debt charge forecasts to $1,200 million – across FY20 and FY21.

In the case of ANZ, the broker noted that:

'Our forecast bad debt charge has been increased by $300M to be $1150M for FY20 and $1200M for FY21.’

All up, of the Big Four Banks, Shaw currently has Hold ratings on NAB, WBC and ANZ; with CBA commanding the only Buy rating amongst the pack.

Ultimately, Shaw notes that CBA is better positioned than the other big four to mitigate the impact of lower interest rates (even if its impact is overstated), a fact that potentially explains why the biggest of the big four has traded at a premium to the other banks in the last 14 months.

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