The ASX banking sector, and ASX bank shares by extension, are implicitly the cornerstone of the S&P/ASX 200 Index (ASX: XJO) Not only do the big four ASX banks make up close to a fifth of the overall ASX 200 by weighting, but the banks are also some of the most-held shares in the retail investor community.
Investors have long been attracted to the banks for their strong, often iconic brands, formidable position in their respective markets, and (of course) a reputation for hefty, fully franked dividend payments.
But 2020 has brought its own unique challenges to the banking sector, which has been evident in the banks' share price performance over 2020 so far. So let's have a look at how the ASX bank shares have come through 2020. As a benchmark in this endeavour, the ASX 200 is currently carrying a 0.9% loss year to date:
| ASX Bank Share (by market capitalisation) | YTD share price gain (as of 15 December) |
Dividends paid in 2020 (cents/share) | 2020 trailing dividend yield | Market Capitalisation |
|---|---|---|---|---|
| Commonwealth Bank of Australia (ASX: CBA) | 3.99% | 298 | 3.59% | $147.37 billion |
| National Australia Bank Ltd (ASX: NAB) | (4.84%) | 60 | 2.57% | $76.93 billion |
| Westpac Banking Corp (ASX: WBC) | (17.61%) | 31 | 1.56% | $71.98 billion |
| Australia and New Zealand Banking Group Ltd (ASX: ANZ) | (6.44%) | 60 | 2.61% | $65.24 billion |
| Macquarie Group Ltd (ASX: MQG) | – | 315 | 2.29% | $49.72 billion |
| Bendigo and Adelaide Bank Ltd (ASX: BEN) | (5.18%) | 31 | 3.32% | $4.96 billion |
| Bank of Queensland Limited (ASX: BOQ) | 7.42% | 12 | 1.53% | $3.56 billion |
ASX banks have a year to forget
As you can see, 2020 has been a difficult year for ASX bank shares. All but CBA, Macquarie and Bank of Queensland have gone backwards over the year to date, with Westpac leading the charge (so to speak) with a 17.61% year-to-date slide. Interestingly, Macquarie was exactly flat for the year on yesterday's closing share price.
It's worth pointing out that most of the factors that have led to this weak performance have been macro in nature, thus affecting all of the banks in equal measure. First and foremost has been the coronavirus-induced recession we have seen this year – the first in almost three decades for the Australian economy.
Banks are usually regarded as cyclical shares, rising and falling in line with economic growth. When the economy is growing, there is typically higher demand for credit and less pressure on loan delinquency. But the reverse is also true. Most consumers in the economy don't tend to want to borrow money amid the employment uncertainty, falling asset prices and falling incomes that a recession often brings.
However, this recession has seen an unprecedented intervention by governments into the economy. Programs such as JobKeeper and the coronavirus supplement have mitigated much of the damage that the recession brought on, which is likely why the losses in the ASX bank sector year to date haven't been, frankly, larger. Remember, back in the global financial crisis of 2008-09, CBA shares fell from over $60 a share to under $24. Luckily, ASX bank shareholders escaped that kind of carnage this time around.
Interest rates, dividends weigh on share prices
We have also seen interest rates hit record lows in 2020. Australia looks set to finish the year with a cash rate of just 0.1%, which is practically zero. When rates are this low, it affects the banks' 'spread', or the difference between what the banks pay in interest on deposits, and the interest they receive on loans. Since the interest they pay on deposits is also approaching zero, there isn't too much room for the banks to lower interest rates on mortgage rates and loans without cutting into profitability. This is also a likely factor at play here.
However, it is worth discussing the divergence between the different banking shares. CommBank is up 4% for the year, whilst Westpac is down close to 18%. We can't explain that away with 'macro' factors. Well, the answer is probably simple.
CBA was the only ASX bank fortunate enough to have an interim payment hit its shareholders' bank accounts before the coronavirus recession got going back in early March. That is why we see a far higher trailing dividend yield for CBA shares in 2020 than most of the other ASX banks. Additionally, CBA was not forced to raise capital in the midst of the pandemic, unlike NAB.
Meanwhile, ANZ deferred its interim dividend, whilst Westpac declined to pay one altogether, along with Bendigo Bank and Bank of Queensland. Additionally, Westpac was also hit with a whopping fine of $1.3 billion back in September, a corporate record. This would have further impeded the bank's ability to pay dividends.
All in all, most ASX investors would have felt the impact of the ASX banking sector on their personal wealth, whether that be through direct ownership of shares, ASX 200 index funds or their superannuation funds
