ASX financials are the worst performing sector on the market this morning as big bank stocks lead the decline.
The Westpac Banking Corp (ASX: WBC) share price tumbled 3.1%, while the National Australia Bank Ltd. (ASX: NAB) share price and Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price shed more than 2.5% each.
The Commonwealth Bank of Australia (ASX: CBA) share price is faring a little better with its 1.7% drop. But that's still worse than the 1.3% decline in the S&P/ASX 200 Index (Index:^AXJO) at the time of writing.
Borrowers still under pressure
The market is worried that the sector has rallied too far ahead of fundamentals during the recent post COVID-19 re-rating.
This fear was brought home by comments from NAB's chief executive Ross McEwan comments to ABC Radio National this morning. He said that as many as 90% of borrowers who are on loan deferrals can't re-start payments.
The bank reached out to business and mortgagees who have been granted temporary repayment reprieve due to financial hardship caused by the coronavirus pandemic.
V-shape recovery a dream
Only 10% to 15% of this group are in a position to resume loan repayments now, which is the half-way mark on the grace period which is expected to expire in September.
"I am optimistic but I'm also very cautious about the underlying signs that are there," reported the Australian Financial Review when quoting McEwan's ABC interview.
"You are still seeing an underlying unemployment rate that is greater than Australia has seen in a long time."
He further cautioned that the recovery could be slower than what many believe and he doesn't think our economy will fully recover from the COVID-19 crisis until 2022.
I reckon the "V" in the V-shape recovery stands for "vulnerable".
ASX bank stock re-rating over for now
If you take his comments on face value, there are three key takeaways for ASX investors, in my view.
First is that the sharp rebound in ASX bank shares is likely over for now and that their share prices will need to consolidate before pushing higher.
Investors won't need to chase these shares higher, although I don't think we will see a big sell-off in equities unless we get a second wave or a Black Swan event.
More government support
Second, the Morrison government's steadfast insistence that JobKeeper and JobSeeker support packages will end in September shouldn't be taken at face value.
If many bank customers continue to struggle to service their loans at that point, the government will have little choice but to keep wage supplements in place. Otherwise, the banking system will come under pressure and that will put the brakes on any economic recovery.
Impact on house prices
Finally, NAB's comments will further dim the outlook for house prices if we assume the other big banks are getting the same feedback from borrowers.
Forecasts of a less than 5% drop in home values by some experts look too optimistic if the majority of borrowers on loan deferrals still can't climb back on their horses come September.
