It has been a tough few months for our big 4 ASX banks. We've seen major share price declines across the board as our local economy comes under increased pressure due to the impact of lockdown restrictions over a range of industries, especially travel, tourism, entertainment and hospitality.
Already, this is leading to sharp bank profit declines from our 4 major banks, impacting their ability to pay-out shareholder dividends.
For example, National Australia Bank Ltd (ASX: NAB) recently cut its interim dividend by around 60% and Australia and New Zealand Banking Group Ltd (ASX: ANZ) has deferred its FY20 dividend payment decision.
Meanwhile, Westpac Banking Corp (ASX: WBC) only yesterday made a similar move to defer its interim dividend decision, as it recorded a 62% reduction in net profit for the first half.
Commonwealth Bank of Australia (ASX: CBA) has arguably weathered the financial storm better than its 3 major rivals so far in this crisis. However, it has still seen a massive share price tumble from $91.05 in mid-February to now be trading at just $59.88. CBA operates on a different financial calendar to the other banks and released its first-half results back in February.
Combined 1H20 results for the ASX banks
Clearly, the major ASX banks have reported a significant decline in cash earnings and profits for the first half of 2020 as the initial impact of the coronavirus starts to affect their bottom lines.
A report just released by professional services firm KPMG reveals that the combined net profit after tax of the 4 major ASX banks was down a massive 43% for the half-year to $8.3 billion. This comes as downward pressure on margins begins to bite and major remediation and regulatory compliance costs are factored in. In particular, as the Australian dollar weakens, this has led to significant increases on the 4 major banks' loan provisions.
According to the report, net interest margins have decreased significantly by 3 basis points during the half as a significant proportion of customers switch from high-margin, interest-only loans to lower-margin, principle and interest loans. In addition, banks must now operate in an environment with historically low interest rates, further impact their margins.
KPMG further noted that loan impairment expenses increased by a massive 226% during the half. This comes as a growing number of bad debts are factored into the banks' books due to the impact of a fast-weakening economy. Specifically, there's an increasing likelihood of further falls in house prices and a rising number of mortgage defaults.
Foolish takeaway
It is too early to estimate the full impact that a weakening economy will have on our 4 major ASX banks. However, KPMG's latest report is an early indication of just how severe this impact could be in the months ahead.
It is also a strong reminder to investors that while the 4 major banks have been strong revenue and profit performers over the past few decades, they are highly vulnerable to economic downturns. This, in turn, can have sharp short-term impacts on their profitability and their ability to pay-out shareholder dividends.
