Banks do heavy the lifting as ASX turns corner

Banks have been powering ASX gains. Picture: Joel Carrett

Australia’s world-leading fiscal stimulus outlined in the budget has improved the nation’s economic outlook and thereby lessened the risk to banks from the worst recession since WWII.

A surge in bank stocks has been a key driver of the best week in Australian shares in the past six months.

With the US market bouncing back after Donald Trump said he would agree to fiscal stimulus on a piecemeal basis, and investors still reacting to a massive increase in stimulus outlined in the budget, the S&P/ASX 200 index rose as much as 1.4 per cent to a five-week high of 6123.4 points.

Profit-taking trimmed it to 6102.2 by the close amid what may be the start of another wave of COVID-19 in NSW, but after advancing every day this week, the index had its first four-day gain since early July.

The index is on track for its best week in six months with a 5.4 per cent rise so far this week.

It has convincingly regained its 200-day moving average for the first time since February, when the coronavirus pandemic sparked the fastest-ever bear market in global sharemarkets.

Banks have done much of the heavy lifting, with the sector up 7.8 per cent this week.

Indeed, while the banks were a major drag on the local bourse from the start of the pandemic until unprecedented fiscal and monetary policy support was implemented in March, and again from mid-August to late September (when leading commentators highlighted the risks they faced from deteriorating loan quality as mortgage holidays expired), the banks have potentially turned into a major source of support for the Australian market as the economic outlook improves.

Interestingly, while the ASX 200 has broken above its 200-day moving average this week, the bank sector index is still 4 per cent below its own 200-day average.

Morgan Stanley’s Richard Wiles noted on Wednesday the bullish implications for banks of the budget’s measures to support the housing market, accelerate business investment and loan growth, while also lowering ­unemployment and business ­failures.

Then on Thursday, Bell Potter’s highly regarded banking sector analyst, TS Lim, upgraded his view on CBA to buy, albeit with an unchanged price target of $73.50.

He also reiterated buy ratings for ANZ and NAB, and a hold rating on Westpac, with an upgraded price target of $19, from a previous target of $18.

“While there appears to be ­little direct benefit to the major banks out of this federal budget, there’s plenty indirectly that would cheer the overall sector,” Lim says.

Despite a 7 per cent economic contraction in the June quarter, an unemployment rate expected to hit 8 per cent in the December quarter and net debt spiralling to 44 per cent of GDP by 2023-24, he sees three “highly positive” ­aspects for banks — as proxies for the economy — from the budget.

Support for business (from wage subsidies, temporary full expensing and loss carry-back for companies with turnover of up to $5bn, small business tax concessions and loan guarantee scheme) and investment (from temporary tax incentives and infrastructure stimulus) will indirectly benefit banks that lend in the small to ­medium-sized enterprises to mid-market and smaller corporates.

“These banks include the four majors, especially ANZ and NAB, as well as Macquarie — when it comes to the $14bn committed infrastructure spending since the start of the pandemic — and the regionals, especially Bendigo Bank and Bank of Queensland, being more of a finance company than a traditional building society in our view, and Suncorp,” Lim says.

The second pillar of support from the budget relates to consumers in the form of lower taxes, with personal income tax cuts backdated to July 1, and wage subsidies that would indirectly benefit banks engaged in mortgage and other consumer lending.

These include all the majors, especially CBA and Westpac, and regionals, especially Bendigo Bank and Suncorp, and smaller regionals.

Lim’s final point is that the budget doesn’t threaten Australia’s AAA sovereign rating.