Sector Return on Assets (bps)
Facing the headwinds
The Australian banks have come under sustained pressure over a number of years. The banks have faced: strengthening of capital, funding and liquidity; increased competition via new entrants and returning players, as well as mortgage brokers; NIMs under sustained pressure from falling interest rates; higher compliance and technology spend; pressure to meet community expectations post Royal Commission; and now the fallout of the COVID-19 crisis and recession.
Banks have de-rated and the outlook may not be as bleak
These headwinds have weighed on industry returns and pushed the banks to 0.80x book, their lowest multiple in 27 years. The banks have consistently under underperformed. At present, the banks contribute 18% of the ASX200 index, down from a peak of 32% in 2015. However, with the economic outlook less bleak than anticipated even a few weeks ago, the likelihood of a further deterioration in asset quality and risk-weighted asset (RWA) inflation driving additional highly dilutive capital raisings has reduced materially. The lower reliance on JobKeeper (wage subsidies) than government expectations also provides some flexibility for further targeted stimulus as current packages, loan deferrals and rental relief expires in October. We reiterate that we do not believe we are out of the woods from an economic or health perspective, especially if a vaccine rollout is delayed. However, we believe the market is likely to factor in a recovery in bank returns unless we see further economic deterioration.