The four pillars of Australia’s financial sector (the Big Four banks) have taken a serious beating, as low interest rates and the coronavirus scare threatens to eat away at their margins. The NAB share price in particular is shedding the most.
Since the beginning of February, National Australia Bank Ltd [ASX:NAB] has watched more than 22% of its share price get wiped out. Australia and New Zealand Banking Group [ASX:ANZ] and Westpac Banking Corporation [ASX:WBC] are not far behind, each recording 21% and 20% drops, respectively. Commonwealth Bank of Australia [ASX:CBA] has fared the best, shedding around 18%.
Coronavirus fears and interest rates likely to squeeze bank margins
Yesterday’s free fall, where the S&P/ASX 200 [XJO] shed a massive 7.33% to finish the day at 5,760.6 points, left NAB, Westpac, and ANZ at multiyear lows and close to their GFC-era share price depths.
All the Big Four banks are still trending downwards today, just not in as extreme a fashion as yesterday.
Is this a buying opportunity?
It might be best to avoid trying to catch the ‘falling knife’.
The banks have traditionally been a go-to for investors because of their great dividends and relative sturdiness. However, with the Reserve Bank of Australia cutting interest rates to historic lows, it’s likely dividends will come under serious threat. Indeed, with the exception of CBA and ANZ, the other two major banks have cut dividends.
With interest rates going to a new record low of 0.5%, it’s difficult not to think that all big four banks will struggle for profitability over the next few years.
Compounding the issue further and fear of the COVID-19 virus clearly gripping the market, the Morrison government is weighing stimulus to go with the RBA rate cut.
For the banks, there is a very real possibility that the housing market will be adversely affected. Meaning less people buying and in turn less profits from mortgages.
Investment banks JPMorgan and UBS have both cut their earnings outlook across the board for the Big Four.
Though NAB revealed some early signs of profit growth in its first quarterly update back in February, the profitability may be impacted going forward.
Dwindling profit margins and the $1.1 billion customer remediation have meant NAB will put the sale of their MLC wealth business on hold and likely result in higher operating expenses, according to JPMorgan.
The reduced buy-back assumptions for CBA and an increased potential dividend cut for Westpac are also on the cards, says the investment bank.
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For Money Morning