Investors are basking in the afterglow of the government's $130 billion job-keeper package announced yesterday although the big four banks are among the standouts today.
The National Australia Bank Ltd. (ASX: NAB) share price and the Westpac Banking Corp (ASX: WBC) share price surged by over 5% each during lunch time trade; which the Australia and New Zealand Banking Group (ASX: ANZ) share price jumped 4.2% to $17.48
The Commonwealth Bank of Australia (ASX: CBA) share price is lagging the group with a more modest 2.4% increase to $65.47, but that's still well ahead of the 0.5% gain on the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) at the time of writing.
Big dividend cut doesn't worry
The outperformance of the big banks comes even as Morgan Stanley warned that dividends from the group will be slashed by more than 30% on average due to the COVID-19 recession.
"Recession is now our base case, even though the Federal Government, the RBA and the banks have announced a range of measures to support households and businesses," said the broker.
Morgan Stanley believes the sector is facing loan losses that are similar to the GFC in 2008-2009 and not like in the early 1990s when losses were more than 60% worse than the GFC.
Generous dividend yields still on offer
Recessions are backward-looking events, while the market is forward looking.
The fact that the big bank stocks continue to rebound strongly from the lows hit during this bear market proves that too much bad news had been factored into the stocks – at least more than big dividend cuts.
But even with the broker's forecast cuts, the big four can still generate yields of between 7% and 8% if you included franking credits.
That's a pretty healthy yield given that record low interest rates and bond yields are likely to persist over the medium-term.
Risks abating
Further, the government's job-keeper stimulus to save six million jobs substantially lowers the risk to the big banks.
One of the key fears was that widespread job losses would tip the economy over and trigger a housing market meltdown as Australian households are among the most indebted in the world.
The unprecedented fiscal and monetary support given by the Reserve Bank of Australia and the Morrison government should also keep the banks' CET1 ratio above the 8% regulatory requirement.
Foolish takeaway
While we aren't out of the woods yet and there's a risk that things could turn ugly again, I think yesterday's stimulus announcement is a game changer for many sectors, including the banks.
Barring a significant deterioration in the COVID-19 pandemic, the worst of the bear market is likely past and I think it's time to go overweight on the big banks.
