Big bank stocks are finally catching a much-needed break this morning as the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) makes a tentative rebound.
Bargain hunters are unlikely to be jumping in head first as few think the market has bottomed when we are still weighing up the economic impact from the COVID-19 pandemic.
But there is one big bank stock that may be worth snapping up now, according to JP Morgan.
Tide turning for the big four
The broker looked at what bad news might be already priced into the sector, which fell harder than the broader market, and upgraded the Westpac Banking Corp (ASX: WBC) share price to "overweight".
JP Morgan reckons that the sell-off in the big four banks reflects all the risks bar a housing market crisis and the broker is turning more positive towards the sector even though it's forecasting a 14% dividend cut over the next three years.
Dividend cut unavoidable
The dividend cut is driven by an average 10% downgrade in its net profit forecasts for the banks in FY20.
"This is premised on expected broad deterioration in the credit quality of some business facilities, but only limited spread to the housing market," said JP Morgan.
"If we're right on this, the majors as a whole look cheap."
Why banks may be looking attractive
There are two key reasons for its bullish assessment. Firstly, the banks are in much better shape than they have been before the GFC. Government regulators have forced them to increase their capital buffers to withstand a crisis.
Secondly, the Reserve Bank of Australia and state and federal governments appear ready to throw the kitchen sink at the looming deep recession.
Big rescue plan
This aggressive stance isn't unique to Australia. The US Federal Reserve announced last night that it will sign a blank check to ensure its financial system is flushed with enough cash to pull through to the other side.
The RBA has so far cut interest rates and launched quantitative easing for the first time in history to keep borrowing costs down. It's also established a term funding facility that will provide funds to banks so that they can continue to write small business loans.
Distressed business and household borrowers are also being offered a repayment holiday, while landlords are under pressure to give tenants time to pay rent.
Reporting season hero?
In light of all these supportive factors, Westpac stands out as JP Morgan believes the stock is just too cheap to ignore ahead of the bank reporting season in May. Westpac, Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) will be handing in their first half report cards early that month.
Commonwealth Bank of Australia (ASX: CBA) already reported in February, which buys the bank a little more time to decide on whether to cut its dividend.
"Valuation now satisfactorily compensates investors for our concerns around likely AUSTRAC and other fines, as well as a possible restructuring charge from a new CEO to address IT complexities," said the broker.
JP Morgan's price target on Westpac is $18.40 a share.
