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Why I think now’s the time to buy bank stocks after ANZ Bank’s (ASX:ANZ) shock results

asx bank shares represented by large buidling with the word 'bank' on it
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The big crash in profits that sent the Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price reeling yesterday may not be such bad news afterall.

Never mind that the ANZ share price tumbled 2.4% on Thursday when management unveiled a 42% chop in full year cash profit.

In fact, ANZ’s apparent gloomy earnings announcement may have cast a positive light on two other big banks that will be releasing their results next week.

When bad news is really good

That’s the view of some experts, including Morgans which reiterated its “add” recommendation on the stock.

“ANZ’s FY20 credit impairment charge of $2,738m is better than our expectation of $2,876m despite us appearing to have the most optimistic credit impairment charge forecast,” said the broker.

“We believe there is much to take heart from in this result about the outlook for expected credit loss (ECL) provisions.”

ANZ Bank results mark a turning point for sector

The question some experts will be asking is whether ANZ’s results actually mark a turning point for the underperforming banking sector.

If the impairment charge truly reflects all the probable bad news for delinquent loans, the sector could be closer to scoring a re-rating sooner than many investors expect.

Also, consider the fact that bank economists have recently been revising up their house price and employment projections.

The bad debt situation may be more benign than what the market is expecting. This is key to the outlook for bank stocks.

Bad debt risks may be abating

While investors have sold out for a range of reasons, bad debts due to the COVID‐19 crisis is the number one drag.

ANZ’s results may have been cast in a negative light yesterday, but it may signal good news for the Westpac Banking Corp (ASX: WBC) share price and National Australia Bank Ltd. (ASX: NAB) share price.

“We expect both WBC and NAB to report FY20 credit impairment charges that are better than consensus expectations,” said Morgans.

“We expect FY21F consensus credit impairment charges for ANZ, WBC and NAB to be revised positively over the course of this reporting season.”

Another positive for ASX bank stocks

What’s more, the net interest margin squeeze that’s depressing bank profits is also easing. This is because the big banks can gain access to the Reserve Bank of Australia’s (RBA) term facility and borrow at 0.25%.

Meanwhile, expectations that the RBA will cut official interest rates to a smidgen above zero means the banks have another excuse to cut rates on savings and term deposits.

This will lead to fatter margins for the big four going forward.

Time to buy ASX bank stocks

It’s a controversial call, but I think those long waiting for an excuse to buy the banks will now have it.

Remember, institutional investors (fund managers and professionals) are underweight on banks. If sentiment turns, bank stocks will surge higher.

I believe the tide is slowly turning. Those happy to stomach the near-term volatility should be gradually building their positions now.

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Returns As of 6th October 2020

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, 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.

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