Via the excellent Jonathon Mott at UBS:
Results were all about the Balance Sheet. P&L takes the back-seat
1H20 reporting season was disappointing, in our view. Although sector NPAT fell 45%, the focus was on capital and provisioning build as the banks prepare for a recession. COVID-19 overlays were at the lower end of expectations, ranging from $807m at NAB to $1,619m at WBC. In total the Major banks put aside $5.0bn in Collective Provision top-ups for the economic downturn. We question whether this is sufficient to cover the Majors’ total credit exposures (EAD) of $4.1 trillion (top-ups 12bps of EAD). Significant additional credit charges look inevitable as the economic slowdown takes hold.RWA inflation / pro-cyclicality guidance most disappointing takeaway
This is expected to reduce CET1 ratios by ~100-200bps. In effect, the Majors’ capital ratios will be hit on both the numerator (impairment) and denominator (RWA inflation) as arrears rise and residential and commercial property prices fall. While the banks and regulator have stated they are comfortable with CET1 ratios falling below ‘unquestionably strong’ benchmarks (10.5%), we believe the market will be less generous. Investors may be unwilling to risk the chance of a large, heavily discounted capital raising. Overseas experience shows this can weigh heavily on share prices.
