Love them or hate them, the big four banks are embedded in our daily life! They probably hold your money, look after your mortgage or you own a slice in your superannuation fund. But if worse comes to worst – do you think they can handle a recession?
We’re talking about the biggest banks in Australia: Commonwealth Bank of Australia (CBA), Australia and New Zealand Banking Group (ANZ), National Australia Bank (NAB) and Westpac Banking Corporation (WBC).
The word on the street is that the Australian banks are world-class and handled the GFC unscathed. This isn’t completely true, they needed a bit of help – the federal government underwrote over 100 billion in loans, short selling on Financial stocks was banned for 8 months and the taxpayer provided a large guarantee on cash held.
12 years later, the banks are now experiencing another crisis, Covid-19. Bad debts are on the rise, mortgages have been put on hold and many can’t repay their loans. WBC have deferred mortgage repayments for 105,000 customers and granted relief to 31,000 business customers. The other banks are offering similar assistance packages.
While this assistance is good for customers, it’s going to affect their bottom line.
Typically the banks have been good for investors and produce large dividend payments. Collectively, the big four earned just shy of 27 billion dollars last financial year. And about 80% of this was returned to shareholders.
Although banking is essential for the economy, it doesn’t come without its risks. Banks essentially lend large amounts of debt to customers and cover this with little equity. After the GFC governments put pressure on banks to beef up their cash reserves, and they did. But this mean’s fewer profits…and fewer bonuses. Over the last 10 or so years, the economy got stronger and this made case for banks to eat away at their cash reserves. The below graph shows the decline in cash reserved to cover bad debts held by the big banks (Macquarie research).
Now the banks have started preparing for the worst, and this means cutting back on dividend payments! NAB has slashed their half-yearly dividend payment, WBC and ANZ have deferred theirs till a later date.
Will Australia will enter a rescission a result of Covid-19? This is a question that is yet to be answered. The big banks appear to be battening down the hatches and preparing for the worst. Reducing or suspending dividends will beef up their cash position, but this means less money flowing through to the economy. If the worst is still yet to come, the banks are in for a rough time.