Is the share price of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) or National Australia Bank Ltd (ASX: NAB) a buy right now?
The big four ASX banks have taken a beating since COVID-19 impacted the share market and economy.
Since their February 2020 highs:
The CBA share price is still down 21%.
The Westpac share price has dropped 35%.
ANZ's share price has fallen 35%.
NAB's share price has declined 38%.
NAB was the only bank that did a capital raising during this period to strengthen its balance sheet. It raised $3 billion from institutional investors and $1.25 billion from retail investors at a discounted price of $14.15. I suppose it's not surprising that NAB's share price is down the most when the profit has to be shared among more shares
COVID-19 provisions
Each major bank has announced credit provisions due to COVID-19. Investors are expecting higher bad debts, it's one of the main reasons why the share prices of CBA, Westpac, ANZ and NAB are down so much.
CBA provisioned $1.5 billion in relation to COVID-19 in its FY20 third quarter update.
Westpac announced a $1.9 billion of potential impacts from COVID-19 within its FY20 half-year result.
ANZ revealed that its COVID-19 credit provision was around $1 billion
NAB said in its FY20 half-year result that its COVID-19 provision was $807 million.
These provisions were made a few months ago, so we'll have to see in the next update whether the provisions were too much or too little.
Several regions of Australia are now COVID-19 free – faster than many expected. New Zealand is also COVID-19 free. So that's good news for the banks with economic activity able to get back to almost full levels.
However, Victoria in-particular is going to cause a hit to the economy, banks and confidence. Prime Minister Scott Morrison said this morning (as reported by the ABC) that the latest round of restrictions in Victoria will cost the economy by $7 billion to $9 billion. About 80% of the economic cost is expected to be caused from directly-affected businesses while the rest of the impact will be due to broader supply-chain effects and the impacts on national confidence. This could be bad news for the CBA share price.
Are the share prices of CBA, Westpac, ANZ or NAB a buy?
You can see that the big banks are going to be impacted at least over the next six to nine months by what's going on. Maybe longer.
Banks are facing higher bad debts and lower net interest margins (NIM) for a number of financial years. The RBA has said that interest rates will stay lower for longer. Banks earn a lower return on their loans when the official interest rate is lower.
The CBA share price should priced for its medium to long-term earnings. I can't see earnings getting back to its underlying FY19 profit figure (excluding the customer remediation) for at least 12 months. It may take two or three years.
Dividends were a big part of the returns before COVID-19. But due to the situation (and APRA's guidance), dividends are going to be a lot lower in 2020 and probably 2021. CBA is going to cut its final dividend by at least 50%, perhaps a lot more, to retain capital. NAB implemented a major dividend cut in its half year result and the other two deferred their dividends.
Perhaps the CBA share price and others were buys during May – before we learned of the jobkeeper overestimation. Under $60 may have been a decent long-term buy price for CBA, but at above $70 I think I would prefer to be patient. But there are plenty of other shares I'd prefer to buy over CBA, even if it were a bit cheaper.
