Banks bashed on recession fears

Bank shares were slammed in some of the heaviest selling of the past decade amid escalating fears of a global recession.

Traders at the New York Stock Exchange on Thursday. Picture: AFP

Bank shares were slammed in some of the heaviest selling of the past decade amid escalating fears of a global recession and the potential for another financial crisis sparked by the coronavirus pandemic.

Australia’s S&P/ASX 200 index tumbled 2.8 per cent to a 10-month low of 6216.2 points as investors rushed to the safety of cash ahead of potential worsening of the pandemic over the weekend.

Australian shares have suffered another punishing week with a further $105bn wiped from the market. The latest selldown followed the Wall Street S&P 500 diving 3.4 per cent on Thursday amid extreme volatility. European markets matched losses on opening on Friday with London’s FTSE down as much as 2 per cent and Germany’s Dax off 2.4 per cent.

Locally, banks did much of the damage with NAB shares tumbling 5.5 per cent to $22.00 — their lowest point since 2012 — as government bond yields plunged to record lows amid expectations of economic slowdown and further official rate cuts. Combined with this week’s 25 basis point cut to the cash rate this will put net interest margins under pressure.

Shaw & Partners banking analyst Brett Le Mesurier said investors were dumping stocks that had exposure to risky corporate debt.

“It’s not just banks that are being cleaned up,” Mr Le Mesurier said.

“Challenger is leading the way down ... The market is picking off those who have greatest corporate exposure, or exposure to things that aren’t home lending.”

Challenger, which holds a large portfolio of corporate debt, much of it sub-investment grade bonds, was down 7.7 per cent on Friday.

Magellan chairman Hamish Douglass told The Australian it was not the direct effect of the coronavirus that was concerning, but rather the flow-on to the broader credit market.

He said credit spreads had “blown out” and cautioned that any future crisis would be triggered by a “negative feedback loop” from elevated levels of junk bonds.

“If the coronavirus goes on for a long enough period, and those companies that are highly leveraged get such a hit to their profitability that they get downgraded and start defaulting … then that could start a negative feedback loop of defaults, unemployment and it is that loop that causes a deep recession.

“We are watching those types of second order effects. The coronavirus does increase the probabilities of those types of events happening.” The local bourse has tumbled 13.2 per cent from a record high close of 7162.5 two weeks ago, its fastest correction since the global financial crisis.

It came as government bond yields plumbed new lows amid safe haven buying.

The US 10-year Treasury bond yield dropped 10 basis points to a record low of 0.805 per cent in Asian trading, driving the yield on Australia’s 10-year bond down 10 basis points to a record low of 0.675 per cent versus the current cash rate of 0.5 per cent after the RBA cut rates this week. In Asian equities, Japan’s Nikkei 225 fell 2.7 per cent, the Hang Seng fell 2.3 per cent, Korea’s KOSPI fell 2.2 per cent and China’s Shanghai Composite lost 1.2 per cent. S&P 500 futures lost 0.7 per cent.

As Australia’s travel ban was extended and local cases of the virus rose to 61 on Friday, analysts sounded the alarm on growth, with suggestions that the drain on tourism and consumer spending could send the local economy into a recession as soon as the second quarter.

The market is now almost unanimous in pricing in a further 0.25 per cent RBA cut next month, while the consensus is that quantitative easing will occur this year.

Those factors combined are set to further squeeze bank profitability and margins, sending financials tumbling by 8.6 per cent for the week.

Commonwealth Bank — now relegated to the second biggest stock on the market — fell 3.7 per cent to $73.93 while Westpac dropped 4 per cent to $21.35 and ANZ lost 4.7 per cent to $22.14.

One senior banker said credit markets were still functioning despite the market volatility.

But he said institutional and business lending divisions were closely watching whether unused lines of credit were being drawn down, which would be an indication that cashflow is under strain.

“Business is still holding up pretty well, but everyone’s got a hawkeye on it. There’s a feeling that there’s going to be an economic implication to all this.”

Risk-aversion ignited a further rally in gold prices, sending the Australian dollar gold price to a record $2544.51 an ounce and helping local miners to notch up outsized gains for Friday’s session.

Saracen Minerals was the most improved with a gain of 5.9 per cent to $4.29 while Newcrest Mining ticked higher by a more moderate 1.9 per cent to $29.08. Evolution put on 3.3 per cent to $4.35 and Northern Star rose by 3.5 per cent to $14.46.

Global ratings agency Standard & Poor’s said Australia was one of six Asia-Pacific countries that would “enter or flirt with recession” as a result of the growing economic damage from the epidemic.

The widening spread of the COVID-19 virus “will prolong the economic fallout” in our region, knocking $US211bn ($318bn) from regional incomes and slowing GDP growth to 4 per cent in 2020.

“Our U-shaped recovery has been pushed back to later in 2020 due to a harder hit to China’s economy in the first quarter, viral transmission outside China, and tighter financial conditions,” S&P said.

AMP Capital’s Shane Oliver warned against calling a bottom just yet. “While there may be a boom in demand for hand sanitisers and toilet paper, the spread of the virus globally and the disruption that containment measures are causing is continuing to increase the risk of a longer and deeper hit to global and Australian economic activity,” he said.

with Michael Roddan