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What the Big Four Banks are doing to stimulate Australia’s economy

As the coronavirus crisis escalates, we examine what the Big Four Banks and other institutions are doing to help stimulate Australia's economy.

ANZ, CBA, NAB and Westpac share prices: the current response

It’s been a busy week for Australia’s banking sector.

Interest rates have been slashed to a record low of 0.25%; the Reserve Bank of Australia today revealed that it is offering to buy as much as $5 billion worth of government securities; and a string of other bank-focused initiatives, aimed at combating the economic slowdown brought on by the coronavirus (Covid-19) crisis have been also announced.

Front and center to all this was an announcement from Anna Bligh – CEO of the Australian Banking Association (ABA) – that small business loan repayments would be put on hold for six months.

Here, Ms Bligh said:

‘Australian banks will defer small business loan repayments for six months where those businesses need assistance as a result of covid-19.’

This move, stressed the ABA CEO, ‘could put as much as $8 billion back in the pockets of small businesses.’

Capital requirements in focus

Besides freezing small business loans, the Australian Prudential Regulation Authority (APRA), looking to get into the action itself, announced that it would be relaxing its expectations around Australian banks' capital positions.

Here the regulator said:

‘APRA is advising all banks today that, given the prevailing circumstances, it envisages they may need to utilise some of their current large buffers to facilitate ongoing lending to the economy.’

The regulator, proving its practicality, pointed out that the ‘objective in building up this capital strength has been to ensure it is available to be drawn upon if needed in times such as this.’

In response to this move, Swiss banking giant UBS did however warn that:

‘The market may be concerned should banks’ stated CET1 begin to fall, potentially resulting in sharp reductions in share prices.’

Mind you, though the Big Four Banks saw their share prices rally sharply today; for the month overall, we have already seen a substantial reduction in bank share prices, as shown in the table below:

Company

Current share price*

1-month performance*

ANZ

$15.81

-43.95%

Commonwealth Bank

$63.15

-30.60%

Westpac

$15.56

-43.29%

National Bank of Australia

$15.61

-46.65%

**Data correct as of 20 March, 12:11pm (AEDT).

Cuts, cuts and more cuts

Finally, though the Reserve Bank of Australia (RBA) slashed official interest rates to a historic low of 0.25% this week, only two of the Big Four Banks made adjustments to their loan rates.

Commonwealth Bank of Australia was one of the outliers here, while making no changes to its standard variable mortgage rates, announced that it would slash its fixed rate mortgages by 70 basis points to 2.29%

The bank noted that these changes would save customers approximately $400 per month, as well as release up to $3.2 billion in cash for Australian households.

ANZ also passed on some of the cut, noting that the bank would:

'Decrease variable interest home loan rates in Australia by 0.15%pa across all Variable rate indices, effective from 27 March 2020.'

Interestingly, in response to this, Goldman Sachs pointed out the ‘fact CBA felt they were able to hold back all of the RBA rate cut from variable rate mortgages (despite the RBA’s efforts to transmit lower funding costs through the economy), it does suggest NIM pressures remain elevated. For the sector, we current forecast yoy NIM decline of -7/-8 bp in FY20/21E.’

On the other hand and overall, Morgan Stanley noted that ‘the 25bp cut in the cash rate reduces [bank] margins by ~3bp, net of hedging.’

This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. Any research provided should be considered as promotional and was prepared in accordance with CFTC 1.71 and designed to promote the independence of investment research. See our Summary Conflicts Policy, available on our website.

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