Banks are like the sails on a ship as they propel the country towards economic growth. Banks finance our businesses, allow millions of people to take out mortgages, and allow us to save money.
When banks begin to topple, the likelihood of the ship sinking is high. Thus it should come as no surprise that the collapse of the banking industry in 2008 gave rise to the GFC.
COVID-19 is taking the wind out of the sails. People are not spending because they are unemployed, businesses are contracting, and people are delaying their mortgage payments. To say the stability of the banking industry is under threat would be an understatement.
Most banking stocks are now trading at a discount. Causing many opportunists to consider investing in the Big Four Banks and Macquarie Bank. However, NAB’s negative news paints a disturbing picture of what’s in store for our Aussie banks. Making many investors re-consider what banks to invest in and when?
Why is NAB not worth the investment?
Investors use a banks earnings, dividends, and financial ratios when deciding whether to invest. NAB’s earnings (September 2019 to March 2020) plummeted. Causing NAB to significantly slash its dividend and place its shares into a trading halt. Also, the Aussie bank is undertaking a $3.5 billion capital raising.
- 51% decline in net profit
- 64% dividend cut, 83 cents to 30 cents
- 33% decrease in cash earnings
The dividend cut will deter many retail investors from buying up shares. Because strong dividend yields often gravitate investors towards the banks. Also, capital raising will dilute existing shares in NAB. Ultimately, driving down the price. Lastly, NAB’s forecast on GDP and unemployment highlights how the worse is yet to come.
- GDP will not return to PRE COVID-19 levels until early 2022
- Unemployment should peak in Mid-2020 around the 12% mark
Thus, all signs point towards a significant bearish decline in NAB’s share price.
Which banking stocks should you look at?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
Most banks should experience a bearish decline from here onwards. However, you must choose the banks that best meet your financial interests. If I were investing in the banks during COVID-19 I would be looking for:
- Experienced management
- The banks least effected by the virus
- Banks with historically high dividends and an impressive recovery post GFC
CBA is trading at a 35% decrease because of COVID-19. However, CBA’s decline is nowhere near as bad as the other three banks.
- NAB down 43%
- WBC down 43%
- ANZ down 41%
CBA’s focus on household lending is a dominant factor in why the bank has not fallen as much as it peers. Because the government is significantly supporting Australian households through the Jobkeeper initiative.
CBA is the heavyweight out of the Big Four Banks, in terms of market cap. Thus, it is no surprise that CBA’s share price grew the most between the GFC and COVID-19. If history is anything to go off, then CBA will likely grow by the most post-coronavirus.
Also, the amount of investors creating commsec accounts is unprecedented. Allowing CBA to generate revenue from brokerage fees still. Generating revenue now is extremely tough. Considering mortgage payments are frozen, interest rates are incredibly low, and businesses are contracting.
To add the cherry on top, CBA provides the highest dividend. While I do expect a cut in the imminent future, CBA’s dividend should increase post-coronavirus. Therefore, making CBA an excellent value investment. (opinion not advice)
Macquarie Bank (ASX: MQG)
Unlike the Big Four, Macquarie focuses less on retail banking and more on investment banking. Thus, making MQG less susceptible to declining interest rates and property prices.
Also, MQG has countless investment divisions when compared to the Big Four. Macquarie’s diversified investment arms were a key factor in driving up MQG’s earnings pre-coronavirus.
The financial intelligence of Macquarie bank’s management adds an extra layer of confidence. For example, MQG expected the markets to be down for 2020. In turn, management adapted its 2020 investing strategy to suit a more stable approach. Allowing the investment bank to mitigate the risk of COVID-19 to a small degree.
Without a doubt, Macquarie’s earnings should decline, followed by a dividend cut. However, Macquarie’s minimal exposure to the declining property market, increases in FUM, and their diversified investments make them arguably the best bank on the market (opinion, not advice).
If you would like to understand our MQG COVID-19 strategy, then click here.
Overall, CBA and Macquarie Bank have the history, management experience, and financials to navigate their ship through the COVID-19 storm.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Senior Manager of YIG.