Bank stocks rake in $17 billion as investors revel in recovery party

It took just one analyst report from the banking industry’s well recognised bear, UBS’ Jon Mott, to finally shift investor sentiment from negative to positive for Australia’s big four players.

It was the mother of all re-ratings and in one day roughly $17 billion was added to the combined market capitalisation of ANZ, National Australia Bank, Westpac and the Commonwealth Bank.

It is quite rare to witness companies the size of our major banks rise almost 10 per cent in a day, although preconditions for a rally in bank shares had been growing in recent weeks. Mott’s positive tone appears to have provided the perfect tipping point.

The note to investors included no startling revelations, rather a reminder of the string of positive data that has emerged over the past week about how the economy is faring with COVID-19.

The positive JobKeeper blunder, which saw the number of recipients revised down from 6.5 million to 3.5 million, the $10.6 billion injected into household coffers from withdrawing money from their superannuation and some better than expected outcomes from credit and debit card spending.

Add to this the successful curtailment of COVID’s spread and it has become clearer that the economy will open up sooner than expected.

The lock-downs that threatened to run for six months are already starting to lift.

A major factor contributing to the marked jump in share prices on Wednesday (ANZ, NAB and Westpac up 8.6 per cent, 7.8 percent and 8 per cent respectively and CBA ahead 4.9 per cent) was their massive 20 per cent underperformance over the broader market in the past three months.

Banks took a hit in late February like most listed stocks but unlike the rest of the market which has recovered half the lost ground, banks shares have maintained an L-shaped price trajectory.

CBA, considered the best performer among its peers, has performed a bit better which explains why Wednesday’s re-rating jump was not quite as marked, albeit still huge.

So unloved have bank stocks been that at one point last week the combined market capitalisation of ANZ, NAB and Westpac was only a whisker higher than that of blood-banker CSL.

The recovery in Australian stocks has gone through phases. The first stocks to find their mojo were those less affected by COVID and as sentiment began to move into riskier territory the COVID affected shares began to take off.

Even companies which have essentially closed down - like Qantas, the casinos and travel operators and retail have experienced renewed interest.

But banks had until now remained unloved by investors, with many concerned about the levels of bad debts and the potential they would need to raise more capital.

When the three banks reported their interim results a month ago (and CBA which released its quarterly update two weeks ago) the analyst community was doubtful that the combined $5 billion taken in COVID provisions would be sufficient. Many were factoring in that the banks would need to announce increased provisions in the full year results and again in the following half.

The banks had devised their level of provisions using three potential economic scenarios - the worst case, the base case and the best case.

But a month ago their base cases looked too optimistic. Today the base case looks more realistic as the economy has responded to the massive sugar hit provided by government stimulus.

Portfolio managers that have been sitting on the sidelines are now starting to come to the view that if banks stocks start to come back it would be a bigger risk to be underweight.

What happens to the economy in September after the stimulus is withdrawn, JobKeeper disappears and mortgage holders and small businesses start paying interest on their loans is another matter.

Given that can has been kicked down the road, investors are happy enough to enjoy today’s good news.