Why the CBA share price and other ASX banks could outperform in FY21

Buying ASX bank shares may be less risky than you'd think. They aren't about to fall off the fiscal cliff and could start restoring lost dividends soon.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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."

Foolish takeaway

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.

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.

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.

More on Bank Shares

A corporate female wearing glasses looks intently at a virtual reality screen with shapes and lights representing Block shares going up today
Bank Shares

Are Westpac shares a buy following the bank's big tech update?

Is now a good time to buy the banking giant's shares? Let's find out.

Read more »

Different Australian dollar notes in the palm of two hands, symbolising dividends.
Bank Shares

Own CBA shares? It's payday for you!

A dividend is heading to CBA shareholders’ bank accounts.

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
Bank Shares

Are CBA shares really worth $120?

It has been a good year for ASX bank shareholders.

Read more »

a group of people sit around a computer in an office environment.
Bank Shares

Westpac shares push higher on $9.8b technology simplification plan

Westpac plans to spend big on technology to close the gap on its rivals.

Read more »

A worried woman looks at her phone and laptop, seeking ways to tighten her belt against inflation.
Economy

NAB boss issues dire prediction for Aussie economy

NAB’s CEO has issued a stark warning on the outlook for Australia’s economic growth.

Read more »

Contented looking man leans back in his chair at his desk and smiles.
Bank Shares

Own CBA shares? Here's the tech stock the banking giant just invested in

CBA has made an interesting investment. Here's what you need to know.

Read more »

A woman gives two fist pumps with a big smile as she learns of her windfall, sitting at her desk.
Bank Shares

ANZ shares charge higher on $57.5 million class action settlement news

ANZ shares have continued their positive run on Monday.

Read more »

Two people comparing and analysing material.
Bank Shares

Better buy: CBA or Westpac stock?

Which ASX bank share is a better buy?

Read more »