Coronavirus: Why the big 4 ASX banks are safer than you think

I think the ASX banks are safer than you think thanks to the capital requirements by the Australian Prudential Regulation Authority (APRA).

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The ASX 200 (INDEXASX: XJO) fell over 7% yesterday and the big four ASX banks were savaged just like the rest of the market.

Yesterday, the Commonwealth Bank of Australia (ASX: CBA) share price fell 6.5%, the Westpac Banking Corp (ASX: WBC) share price dropped 8.6%, the National Australia Bank Ltd (ASX: NAB) share price declined by 8.5% and the Australia and New Zealand Banking Group (ASX: ANZ) share price went down 8.5%.

The last time shares dropped like this the GFC was happening. Is another GFC happening? Perhaps, we don’t yet know how bad the economic effects will be over the next 18 months.

Australia managed to sail through the GFC a decade ago. But there are fears we won’t be so lucky this time because China was the first one to be heavily affected. An immediate point against that is that China is starting to go back to work and may stimulate the economy which may benefit Australian resource businesses.

But there’s one reason in-particular that I think the big ASX banks are safer than you think: the Common Equity Tier 1 (CET1) ratio. When I’m writing about the big banks I regularly include what the banks’ latest CET1 ratio is.

Why is the CET1 ratio important?

The Australian Prudential Regulation Authority (APRA) has been requiring the major banks to increase their CET1 ratio because they are systemically important banks in Australia.

It means the banks have to hold additional capital so that they are ‘unquestionably strong’, even in a tough downturn.

The current required CET1 capital ratio for the major banks is at least 10.5%. The timing was just right because the major banks only recently reached the 10.5% or higher level.

So what?

It will hopefully mean that banks won’t require any public assistance and the major banks can easily continue their main role of providing financial services, particularly loans, for businesses and individuals during a/this crisis.

If banks can sail through this then it’s unlikely to be as bad as the GFC in lending terms where liquidity disappeared in the US and Europe. However, some other sectors may still be hit hard, perhaps harder than the GFC.

Are banks buys?

They are certainly a lot cheaper. I don’t know if they’re buys yet because we don’t know what the economic fallout will be. Whatever happens, I still think that the banks have slow long-term growth, so I think there are better opportunities out there.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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