Major banks to get a full-year earnings boost as Covid-crisis loan provisions released

  • By Elizabeth Fry

The sharp improvement in the Australian economy, particularly the employment market, is set to make the major banks Covid-crisis loan loss provisions redundant, according to a new report from CitiGroup’s banking analysts.  

Citi analysts estimate full-year consensus earnings could be an average 12 percent higher if just 60 percent of the excess Covid loan provisions are run back through the profit loss statement. 

Initially, many market participants believed that the rundown of JobKeeper would create a ‘fiscal cliff,' exposing the major bank balance sheets to high levels of impaired assets.  

However, Citi said the growth in employment across the economy is now expected to keep impaired loans much lower than first anticipated. 

“The stress of Covid is now expected to be far more limited, to selected businesses and employees in a few small sectors,” the analysts said in a note. 

“The increase in loan loss provisions, calculated during the middle of the Covid lockdowns, envisaged a much broader economic impact." 

“With only minor provision write-back to date, there is now a major disconnect between the assumptions supporting the estimate of these provisions and the actual performance of the economy.” 

Given the unexpected impact of COVID, Citi urges investors to look through the provision build-up and then the now expected run down. 

Auditor ruling 

The analysts consider it likely that auditors will require much of these excess provisions to be removed by possibly the end of this year. And, that management is set to come under pressure to reveal the timing of loan provision run downs in this upcoming reporting season. 

Last year, they went on to say, the average bad and doubtful debt expense was 41basis points of which 29 basis points related to the collective provision build-up for future loan losses. “Over the next 6-12 months, most of the excess provision is expected to run back through the profit loss statement.” 

The broker said its full-year earnings estimates are above consensus for each of the major banks, primarily based on lower bad and doubtful debts.  

Citi added that if the auditors require the banks to remove either 60 percent or 90 percent of the Covid-related loan loss provisions National Australia Bank with no Covid related provision write-backs recorded in 2021 could expect between 20 percent and 30 percent earnings upgrades compared to the current consensus. Commonwealth Bank could see an increase of between 13 percent and 18 percent. ANZ and Westpac are lower as it seems the first quarter loan loss provision write-backs have already been factored into consensus earnings estimates.