By William McInnes
The introduction of stage four restrictions in Victoria has rocked bank stocks as investors rethink the state of the economic recovery and the Reserve Bank prepares to hand down its own forecasts assessing COVID-19’s damage.
Heavy selling in the banks on Monday saw the four majors hit hard as doubts re-emerged over asset quality, future dividend prospects and bad loan provisions.
“The recovery was already fragile and this just adds another level of uncertainty going forward,” said Wilson Asset Management lead portfolio manager Matthew Haupt.
“We were in the early stages of a recovery and now going into another lockdown scenario just adds to the stress in the Victorian economy and that spreads nationally through things like trade and manufacturing.”
Commonwealth Bank fell 1.8 per cent to $69.63, Westpac dropped 3.5 per cent to $16.49, NAB slid 4.1 per cent to $16.94 and ANZ declined 4.1 per cent to $17.22.
The smaller banks were also hit, with Bank of Queensland sliding 3 per cent to $5.77 and Bendigo & Adelaide Bank dropping 4.7 per cent to $6.56.
The banks had already set aside large provisions for loan defaults earlier in the year and a second wave of lockdowns could mean their balance sheets become more constrained.
“With more uncertainty, the boards’ confidence in paying out dividends decreases and that’s just another layer,” the fund manager said.
“It’s just natural, the more uncertainty you have, the more you can’t make these dividend payouts.”
Victoria’s lockdown will also be causing concern for the Reserve Bank, with the board set to meet on Tuesday. The bank will also release its Statement on Monetary Policy (SoMP) on Friday, which will include its complete set of economic forecasts.
“I think the situation in Victoria will certainly be concerning the RBA and they’ll have to make reference to it in their statement,” said QIC chief economist Matthew Peter.
“What the RBA will do in the near-term is less obvious.”
In May, the central bank was forecasting GDP for the 12 months ended December would be minus 6 per cent. However six weeks of stage four restrictions in Victoria, which represents around 25 per cent of the Australian economy, could pose a risk to that forecast.
“The key thing for the bank is that they’ll be rushing around redoing their forecasts to present to the board and for this Friday’s SoMP, so the timing is pretty unfortunate for them,” said Macquarie economist Justin Fabo.
QIC’s Dr Peter said the new restrictions could mean the Australian economy experiences a third-consecutive quarter of contraction in September.
“Victoria’s lockdown, if you look at the experience in the first wave, could knock off 1 to 1.5 percentage points of growth in Q3,” he said.
“That’s quite a hit to growth. We were looking at growth being positive but this could result in GDP being close to flat in Q3.”
Dr Peter believed the Reserve Bank appeared to be more conservative in its forecasts than market consensus.
The Reserve Bank has already engaged in yield curve control on the three-year bond rate but its buying has been limited to that part of the curve.
“I think the RBA has their monetary policy at their own self-perceived limits,” said HSBC Australia and New Zealand chief economist Paul Bloxham.
“There’s going to be discussion about the pace of recovery and what that means for the growth outlook but I don’t expect them to take additional action.”
Governor Philip Lowe may press the government to do more on the fiscal side.
“The RBA hasn’t really got tools to boost the macro economy and it sees the fiscal tools as more powerful and appropriate,” said Mr Bloxham.
“The Victoria issues are going to slow down the national recovery. There’s likely to be some flow-on effects from a weaker story. Fiscal policy is a far superior set of tools.”
Economists suggest the Reserve Bank would favour an extension of the current wage subsidies and increased spending on large scale infrastructure projects.