Fund managers and analysts warn that the real test for banks could come over the second half of 2020 as the government stimulus wears off.

UBS banking analyst Jonathan Mott said banks were not out of the woods yet.
He is concerned about the “potential cliff impact” of about $100 billion in policy support ending in September. This includes a halt to the JobKeeper subsidy for 3.5 million people and a reduction to previous levels for the JobSeeker allowances for 1.6 million people.
Mr Mott also warned investors to consider the possibility of the economy double-dipping over the coming months after the economic stimulus was removed.
Dividend estimates
“Further, in the event of a second wave of infections or if a potential vaccine is delayed, preventing international travel, the chances of worse economic outcomes and higher levels of impairment is possible.”
UBS expects the big four banks to pay dividends over the current financial half-year periods.
For the financial year ending September 30, 2021, NAB’s total dividends are tipped to remain flat at 60¢ a share, and the total dividends at ANZ and Westpac are forecast to more than double to 70¢ and 95¢ a share, respectively.
Commonwealth Bank is forecast to pay total dividends of $3.50 for the financial year to June 30, 2020, before trimming payouts back to $2.65 in financial 2021.
Mr Williams said he was not excited by the banks’ dividend prospects.
“We also think that the dividend payout ratios of the banks need to be structurally altered,” he said.
“I think that’s clear from the crisis, they are paying too much in dividends. I think conservative boards will really rein in that payout ratio. So I think with dividends shrinking a bit, it’s hard … to make a really strong bullish case for the banks.”
Borrowing costs fall
On Wednesday, Goldman Sachs told investors the widespread stimulus payments and central bank liquidity injections had contributed to a record $90 billion in surplus funding in the local banking system.
It believes an associated retail deposit flood will help the banks lift their net interest margins (NIM) as a key driver of profitability.
The broker said that since January, the Reserve Bank had cut the cash rate by 50 basis points, but the banks had, on average, reduced deposit payment rates by 50 per cent of the move in the cash rate.
Goldman estimates that term deposit rates were cut by an average 17 basis points over May for one, three, and six-month term deposits.
A widening spread between funding and lending rates should boost the banks’ NIMs and returns on equity, a key driver of share prices.
The broker also said the record liquidity had sent inter-bank borrowing rates so low that the spread between them and the overnight index swap (OIS) rate had turned negative.
It estimates that every 10 basis-point fall in the OIS spread adds one basis point to NAB’s NIM. A three basis-point lift in the bank’s forecast NIM for financial years 2021-2022 translates into a 21.8 per cent increase in the broker’s valuation to $21.64.
Goldman also raised its share price valuations on ANZ, CBA, and Westpac by more than 11 per cent.
Despite the improved operating environment, it told investors Tuesday’s valuation rally left room for caution.
It said the sector was trading on a 12-month forward price-earnings ratio of 16 times, well above the 15-year average of 12.5 times.
Data out of the Australian Bureau of Statistics on Wednesday showed seasonally adjusted new home loan financing fell 4.8 per cent in April, compared with forecasts for a 10 per cent contraction.
According to UBS’ latest forecasts, NAB should post a 4 per cent compound credit growth rate over financial years 2019-2021. Westpac’s credit growth is tipped to be 1.6 per cent.
UBS upgraded both banks to buy ratings on the basis that net interest margins stabilise and returns on equity climb.