Citi issues ‘buy’ recommendation for banking sector

Citi recommends investors wade back into the banking sector after a 40pc plunge in share prices since early February.

Citi issues buy recommendation for banking sector. Picture: AAP

Citi has recommended investors wade back into the banking sector after a catastrophic, 40 per cent plunge in share prices since early February.

In a report on Tuesday, analyst Brendan Sproules issued a buy recommendation for the sector, saying the the coronavirus pandemic was very different to other market and credit events, with the economy hit by worker and customer absenteeism and supply-side crunches.

The major banks, however, were “much better prepared” for an economic shock compared to the 2007 global financial crisis.

“The key difference heading into the current COVID-19 event is the preparedness of the banking sector’s balance sheets for a severe crisis,” Mr Sproules said.

The level of common equity tier one capital had doubled, the sector’s reliance on offshore and domestic wholesale funding had fallen considerably, and the government and the Reserve Bank had unleashed “unprecedented” stimulus to mitigate the impact on the economy.

The response had also been significantly faster and more targeted to the emerging issues compared to 2007, with $190bn of stimulus announced for households and SMEs.

“Looking ahead, the combination of a strong demand for lending, and a lack of available funding outside the banking system, as well as the prospect of a large number of defaults, will all combine to drive asset spreads wider and net interest margins higher,” Mr Sproules said.

Credit provisions, he said, would rise dramatically in the initial phase, but credit quality would remain unclear until the economy started to recover.

Ultimately, credit losses would be lower than the financial crisis because the virus would hurt people-orientated, service-based industries with lower debt levels.

Under Citi’s base case, major bank cash earnings would fall by 11 per cent in the 2020 financial lower, 4 per cent in 2021, and then lift 17 per cent in 2022.

Dividends were likely to be cut by 10-18 per cent, starting in August with Commonwealth Bank, followed by the three other majors in November.