Buying ASX bank stocks may be less risky as you’d think as they aren’t about to fall off the fiscal cliff, according to one leading broker.
The fiscal cliff is the withdrawal of support measures offered during the COVID-19 pandemic come September. These include the government’s wage supplements as well as rent and loan repayment holidays.
Fears that consumers and businesses won’t be able to repay debts have weighed heavily on the banking sector, which is lagging the broader S&P/ASX 200 Index (Index:^AXJO).
Can CBA and other ASX banks outperform?
But there’s a chance for the Commonwealth Bank of Australia (ASX: CBA) share price, Westpac Banking Corp (ASX: WBC) share price, Australia and New Zealand Banking Group (ASX: ANZ) share price and National Australia Bank Ltd. (ASX: NAB) share price to play catch-up in FY21.
This fiscal cliff may turn out to be more of the molehill variety than a mountain, if Citigroup’s prediction is on the money.
Dividend revival for ASX banks
The broker drew on lessons learnt in New Zealand and is not only predicting that ASX banks will survive the fiscal cliff but will be in a better position to pay dividends in the near-term.
“With more severe stage 4 restrictions in place and nonessential life shuttered through April, the Kiwis took great sacrifice, but have emerged from all restrictions much faster than other countries,” said Citi.
This makes the NZ market an ideal place to study the impact of lockdowns its banking sector, particularly as NZ and Australia have so much in common.
Extending stimulus is key
The NZ experience shows that the Morrison government will need to keep supplementing wages even after the JobKeeper and JobSeeker programs expire in September. This is especially so if consumer spending is to make a V-shape recovery.
Mark your calendar for July 23 fellow Fools. That’s when the federal government will provide an update on this and other stimulus measures – and I’m keeping my fingers tightly crossed.
However, business confidence will take more time to repair although Citi thinks the disconnect is a matter of timing and not something more sinister.
ASX banks and the fiscal cliff
This isn’t to say there won’t be long lasting impacts from the coronavirus meltdown. Going forward, businesses will need to find new ways to cut costs as their operations will likely be stuck on a lower gear for longer.
“Like Australia, the focus in NZ is on the ‘fiscal cliff’ when the wage subsidy end,” added Citi.
“However, our takeaway this week is that while the cliff marks the end of ‘liquidity injection’, there remains a substantial excess of liquidity to draw down on and to cushion bad debts.”
If our big banks do not need to make additional provisioning for bad debt, the sector will re-rate strongly.
This is particularly the case if the banks feel confident enough to restore some of their dividend cuts later this year.
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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. Connect with me on Twitter @brenlau.
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