Australia's financial services sector, particularly the big four banks, are set to underperform over the coming months, with mounting business and home loan deferrals to blame.
That's according to T. Rowe Price head of Australian equities Randal Jenneke, who recently revealed the investment manager is bearish on banks.
"The loan deferral issue is a bigger issue than the market thinks," he told Financial Standard.
"Firstly, the numbers are quite large... total loan deferrals are now $266 billion. And it's not just mortgages. It's also SME loans, or business loans."
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Given the second wave of COVID-19 cases in Victoria, as well as a renewed threat in NSW, Jenneke believes these numbers are only going to worsen.
"Clearly, Victoria changes the economic picture; it's going to defer GDP growth, it is going to hurt unemployment," he said.
"And so the risk of higher provisions and bad debts for the banks has also gone up. And the extension of loan deferrals for another four months is going to delay any possible change to dividend policy into FY21."
Despite these escalating loan default concerns, he does not believe that we are likely to see further capital raisings from the banks.
"The bank's balance sheets are in good shape," Jenneke said.
"So while there are definitely risks around their provisioning and what's going to happen with the loan deferrals, they have a lot of capital, so it's unlikely that they'll need to come to the market."
He also does not believe the big four's exit from wealth management will impact dividends in the future.
"It's irrelevant; these businesses are tiny in terms of their profit contribution," Jenneke said.
"If you think about all of these wealth businesses inside banks that were very small, they would contribute somewhere between three to six or 7% of profits for the banks."
This meant the bank's divestment from wealth was "an absolute no brainer", he said.
"This has been an unmitigated disaster for the banks," Jenneke said.
"Given all the reparations that they've had to pay for what has occurred in these businesses, they've made no money out of wealth, [while] the reputational damage has been immense."
He argued the banks only have themselves to blame for the systemic issues that occurred within their wealth management businesses.
"I think the broader question here is why did this happen?" Jenneke said.
"This is a cultural issue, and the banks, rather than actually trying to change the culture of the wealth management businesses and some of the practices that we've seen, actually allowed those practices to continue, if not become even worse."