The ASX big bank shares have staged a U-turn and are trading higher as Morgans urge investors to buy these stocks with one exception.
The turnaround by the big banks helped the S&P/ASX 200 Index (Index:^AXJO) recover from morning losses with the index gaining 0.5% during lunch time trade.
But the big banks are outperforming the market. The Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price is the best performer with a 1.7% jump to $19.06 at the time of writing.
The Commonwealth Bank of Australia (ASX: CBA) share price isn't far behind with a 1.5% increase to $69.72, while the National Australia Bank Ltd. (ASX: NAB) share price and Westpac Banking Corp (ASX: WBC) share price added just under 1% each.
Not so bad debt
The positive sentiment coincided with Morgans' report that stated too much bad news have been factored into the sector.
The market marked down the big banks on worries about rising bad debts due to the COVID-19 shutdown of our economy.
"We believe the bad debt damage being factored into current major bank share prices is overdone with the exception of CBA, which is one of the key reasons why CBA is our least preferred major bank," said the broker.
"WBC is the only major bank where we believe the bad debt damage being priced in is greater than that experienced during the GFC, and this is one of the key reasons why WBC remains our preferred major bank."
ASX big banks to buy now
The remaining two big banks are also rated as "add" (equivalent to "buy") by Morgans with ANZ Bank only just getting upgraded from "hold".
The headwinds the sector is facing due to the pandemic isn't as severe as those experienced during the GFC, according to the broker.
This is because the federal government and the Reserve Bank of Australia (RBA) have moved quickly to support the economy and banking sector.
"We generally describe the current credit loss provisioning of the major banks as effectively being predicated on the assumption of a 'squeezed-U-shaped' recovery for the Australian economy," added Morgans.
"At this stage this continues to look justified, particularly given the easing of lockdown restrictions being experienced in Australia."
Lost dividends
But it isn't all good news. The broker thinks that ANZ and Westpac won't pay their interim dividends, and the banks will announce this bad news in August.
Both banks deferred their dividend decision when they reported their first half profit results one to two months ago.
The broker also believes that CBA will defer its final dividend decision cum August, but will make this payment in November.
The other three banks are tipped to declare their final dividends in the same month.
