This has been an inauspicious year for ASX bank stocks and 2019 will be known as the year the sector shot itself in the foot – several times.
The key question facing shareholders now is whether this is the time to be loading up on the underperforming sector for a potential 2020 recovery.
Shares in the big four have not kept up with the market so far with the Commonwealth Bank of Australia (ASX: CBA) share price being the best of the laggards on a 15% year-to-date gain.
The National Australia Bank Ltd. (ASX: NAB) share price is in second place with a 10% increase, while Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) have only managed increases of 5% and 1%, respectively.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index jumped nearly 24% since January. Those who subscribe to the Dogs of Dow theory might think these blue-chip underperformers will make a rebound in the new year.
But if you are buying into the sector on expectations of growth, you are likely to be disappointed. I don't think we will see any improvement in the big banks underlying businesses in 2020. If anything, profits are likely to remain under pressure for at least another year.
Rate cuts vs. QE
There are a few reasons for this. The first is that interest rates are likely to fall further in 2020. The Reserve Bank of Australia (RBA) governor Philip Lowe said that rates will need to fall to 0.25% from the current 0.75% before the central bank will contemplate quantitative easing (QE).
Given that momentum in our economy is stalling, the RBA will need to do more. That means more rate cuts as opposed to QE, which involves the RBA buying government bonds. Rate cuts are bad for bank margins while QE is generally good.
The is because banks will be under pressure to lower the interest they charge whenever the RBA does a cut in the cash rate. On the other hand, QE lowers the cost of capital for banks while they can continue to charge the same rate to borrowers.
Market share
The second issue is the loss in market share. The big banks have been losing ground to smaller non-bank rivals when it comes to mortgages. This thematic is unlikely to change in 2020, and may even accelerate.
Macquarie Group Ltd (ASX: MQG) noted that credit growth for home loans is growing at just under 3% in 2019 compared to the same period last year. But credit growth across the big four is only 0.3 times that of the wider market.
It doesn't help that borrowers are have been increasing their level of repayments. There is also a lower level of turnover and tighter lending criteria that is putting the brake on growth, added Macquarie.
If the rate of slowing continues at the current trend, the sector will be cum-downgrade – again!
Big fines and class action
The Westpac AUSTRAC scandal perfectly highlights the risks big banks are facing when it comes to hefty fines. Westpac may need an extra $1 billion or more to settle penalties if it loses a court case brought on by the regulators.
It isn't the only one that is under regulatory pressure too, although the magnitude of the possible fine is likely to be significantly heftier.
You can bet lawyers are plotting class actions given how big and juicy a target the banks make. The costs involved in any legal action comes at a time when bank balance sheets are starting to look stretched.
If we do see a marked turnaround for the sector, it may not be until late 2020 or 2021.
