The Bendigo and Adelaide Bank Ltd (ASX: BEN) share price has managed to stage a late rebound to finish the day in the black even after being hit by a recommendation downgrade from Deutsche Bank.
The BEN share price jumped 1.4% to $10.37 in late afternoon trade after spending the morning in the red although it couldn't keep up with the big four banks.
The Commonwealth Bank of Australia (ASX: CBA) share price, Australia and New Zealand Banking Group (ASX: ANZ) share price, Westpac Banking Corp (ASX: WBC) share price and National Australia Bank Ltd. (ASX: NAB) share price are up around 2% or more ahead of the close.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is also enjoying good support as risk appetite returns.
The downgrade that didn't feel like a downgrade
This is probably why investors were willing to overlook the bearish call by Deutsche who cut its recommendation on the bank to "sell" as it believes it is the most exposed to the mortgage market among its listed peers as that makes up 71% of its loan book.
"While our base case is not for a broad-based credit cycle, we are now factoring in a significant increase in impairment charges," said the broker who has a price target of $9.50 on the stock.
"We also see BEN's Homesafe business as a vulnerability, with revaluation gains set to reverse given falling house prices. While this does not materially impact cash earnings, it does impact book value."
"Homesafe" is Bendigo Bank's reverse mortgage-like business.
2 big issues confronting investors
A reverse mortgage allows home owners without a mortgage to secure a loan against their property. Reverse mortgages were featured in a negative light on ABC TV recently as critics say it amounts to ripping off the elderly (as the elderly are more likely to own their homes outright).
Deutsche wasn't referring to the ethical or moral questions regarding reverse mortgage but is pointing out that reverse mortgages only work for the lenders if property prices are rising.
What I think is more significant is that the broker is expecting a significant rise in impairments. I believe Deutsche is the first to be factoring this in its valuation of the banking sector.
I've written about the growing risk of rising bad and doubtful debt provisioning as the property price slump takes hold.
This would be a big issue for bank profitability as our banks have posted better than expected growth in earnings that are largely driven by lower impairments or provisioning.
If the impairment forecast comes to pass, I believe ASX investors will witness something that has never been experienced before (at least not in recent memory) – a sustained period of profit losses by the banks.
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