Banking analysts have been fielding one key question from investors in recent weeks: what will return on equity, or ROE, look like for the major banks, once the pandemic crisis passes?
ROE is important for investors because it could determine how much banks can afford to return to shareholders.
The banking analysts have now formed a consensus position and are suggesting that the post-Covid-19 ROE will settle at around 10 per cent, once credit losses are absorbed.
It’s a long way from the glory days but will still allow banks to keep paying solid dividends, providing attractive returns in a yield-starved market.
If you own bank stocks at the moment, you’ll be playing a waiting game for a while as nobody knows the true extent of the loan troubles.
Regulators and banks are working behind the scenes to avoid falling off a cliff in October, when stimulus and leniency are due to end.
Data released by the Australian Banking Association recently shows the total number of deferred loans are 7 hundred seventy two thousand and are rising by less each week, which is a promising sign.
Macquarie analyst Victor German said “Current operating conditions are still far from normal and given significant uncertainties we believe a discount is warranted. But he reckons that Macquarie’s sustainable return on capital will help them to maintain payout ratios of around sixty 5 to seventy 5 percent, representing a sustainable dividend yield of between 4 and 6 percent when conditions normalise and capital targets are met.”