With COVID-19 causing havoc in the economy, will Westpac (ASX: WBC) or CBA (ASX: CBA) shares be good buy ideas?
Will bank dividends be cut?
Both Westpac and CBA shareholders face a likely dividend cut this year. I don’t think you can read too much into the current yields. There are multiple issues biting for the banks simultaneously.
The RBA interest rate is down to a record low of 0.25%. That should mean a lower net interest margin (NIM) for the banks, and a lower profit.
COVID-19 is causing big problems for the economy, with many businesses shutting. Through the chain of effects, borrowers will be leaning on the banks to give payment holidays for the next few months. No payments means less profit for the banks.
The Reserve Bank of New Zealand (RBNZ) is the latest regulator to say that banks can’t pay a dividend. Westpac and CBA earn some profit in New Zealand, so that profit is now self-isolated within the country until this is over.
I think it’s more of a question of how much the dividend will be cut for each bank.
Will CBA or Westpac be better off?
I think both of them will be better off than ANZ (ASX: ANZ) and NAB (ASX: NAB). Government support through jobkeeper, jobseeker and the coronavirus supplement will help households but there isn’t much direct support for businesses. ANZ and NAB are more focused on business lending compared to CBA and Westpac.
The government support will help individuals make their loan payments through COVID-19. Obviously both CBA and Westpac have huge exposure with their large loan books.
Of the two I’d pick CBA for its higher quality and its (historical) reliability of profit. Don’t forget that Westpac is still facing a huge potential fine which will hit earnings. I’d rather invest in the technology shares below rather than the banks:
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Disclosure: at the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.
