Good news will be in short supply on our market today. But feedback from Brisbane-based credit union CUA could shine a ray of hope for coronavirus-afflicted ASX banking stocks.
The S&P/ASX 200 Index (Index:^AXJO) 1.8% in early trade. Rising fears of a second wave of COVID-19 cases as the world records 500,000 deaths and 10 million infections will give market bears the upper hand today.
Those desperately searching for some sliver of good news may be encouraged by what Australia’s largest customer-owned lender told the Australian Financial Review.
V-share bank recovery?
CUA undertook a survey of its borrowers. Its chief executive Paul Lewis said more than three-in-five of its customers on COVID-19 assistance are ready to restart payments now.
That’s encouraging as it supports hope of a V-shape economic bounce back given that we are only at the half-way mark for the pandemic assistance packages offered by banks and the government.
Banks offered its customers affected by the pandemic lockdown to defer loan repayments for six months until October.
Bad debt a big thorn in the side
But the move also heightened worries about bad debts when the government’s wage assistance ends at the same time as the loan relief program.
This is one key reason why the Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking GrpLtd (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) share prices have tumbled.
The findings by CUA stand in contrast to the feedback that NAB received a few weeks ago. As reported back then, NAB’s boss Ross McEwan said as many as 90% of its customers on loan deferral can’t restart paying their mortgages.
Emerging from the COVID-19 freeze
But as the Australian economy is continuing to emerge from the COVID-19 deep freeze (apart from Victoria), perhaps things are looking brighter now.
However, before you get too excited, there are some caveats to CUA’s upbeat findings. Firstly, credit unions tend to have more conservative lending practices. This means their borrowers tend to be in better financial shape heading into the crisis.
Further, its borrowers are usually older. This is important as the massive job losses have hit younger Australians harder as they are concentrated in industries most affected by the lockdowns, such as hospitality.
CUA also has limited exposure to small business lending, unlike the big four – particularly NAB. Some economists are predicting a wave of small business closures when the government’s JobKeeper and JobSeeker programs end on September 24.
Bad debt is a bigger issue for ASX banks than for credit unions, although it’s the Big Four that wields the market power.
The big banks can outprice smaller lenders as they have a funding advantage and the balance sheet strength (assuming bad debts don’t lift significantly from forecasts).
I believe coming out of the crisis, the big four will have the upper hand. That’s why I own shares in all the big banks.
Now all they have to do is to get through this shorter-term volatility.
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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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