ASX bank stocks are leading the crash on the S&P/ASX 200 Index (Index:^AXJO) as they have a lot to lose from the COVID-19 fallout.
The battle to recovery for our largest financial institutions may have just gotten tougher by the impending rise of a "zombie army".
This army isn't from beyond the graves, although it should still send chills down the spines of ASX investors.
Expected surge in bankruptcies
Data from CreditWatch pointed to a 59% drop in the number of companies going into voluntary administration in August when compared to the 2019 average, reported the Australian Financial Review.
This implies that the government and other COVID-19 support packages are the only lifeline stopping small and medium enterprises (SMEs) from falling over.
It isn't only JobKeeper wage subsidies that's allowing the army of fallen companies to keep on trading. The federal government's moratorium on insolvent trading laws is breathing life into the undead.
ASX Bank earnings risks are growing
But the life support measures are scheduled to be turned off in 2021, which will pose a risk to ASX bank earnings. This is particularly so for National Australia Bank Ltd. (ASX: NAB) as it's most exposed to SME lending, although the other big banks are also in the firing line.
These include the Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking GrpLtd (ASX: ANZ).
What's also worrying is the blowout in late payments from businesses. The time it takes for companies to make payment increased to 43 days last month, or 2.9 times longer than in 2019, noted CreditWatch.
D-day for ASX banks in mid-2021
If this isn't enough to scare you, experts believe full impact of SME loan defaults will only be felt around the middle of next year – roughly the same time as when troubled home loans are expected to hit bank bottom-lines.
The home loan issue comes from distressed mortgagees who have lost their jobs or suffered a wage cut due to COVID-19.
Slumping house prices are making this task more complicated as some borrowers may be forced to sell their homes into a weakening market.
While the worst of the COVID-19 earnings hit seems to have passed for most ASX stocks, things could get uglier for ASX banks in 2021.
ASX bank investors better ready themselves for a fight!
