The ASX banking sector is leading the S&P/ASX 200 Index (Index:^AXJO) lower this morning on fears of a bad debt blowout.
Even though the top 200 index is recovering from the early sell-off and is trading just under breakeven at the time of writing, big bank stocks are still deep in the red.
The hard lockdown of Victoria is souring sentiment towards these big lenders. The Victorian Premier Daniel Andrews is expected to announce widespread business closures in the state later this afternoon.
Bad debt risks just got worse
Investors are "selling the rumour" on speculation that many more businesses are unlikely to survive the strictest COVID lockdown in the country.
The National Australia Bank Ltd. (ASX: NAB) share price and Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price are the worst hit of the big four. They have shed close to 4% each.
The Westpac Banking Corp (ASX: WBC) share price is faring a tad better with a loss of 3.1%, while the Commonwealth Bank of Australia (ASX: CBA) share price declined 2.2%.
This is probably because NAB has the largest exposure to small and medium business (SMB) lending. Meanwhile, APRA data showed ANZ Bank is leading the group in growing its business lending business in the past three months. Talk about bad timing!
Looming fiscal cliff
Even before stage four restrictions were imposed, experts were divided on whether ASX banks held enough capital to buffer their balance sheets from the first wave of the COVID-19 fallout.
While the big four are well capitalised, investors (and probably the banks themselves) are having a tough time quantifying the risk of the looming fiscal cliff.
This cliff represents the withdrawal or tapering of the support measures to support the economy runs out in October.
State of disaster
The latest Victorian defeat by coronavirus will exacerbate the chances that more businesses and mortgagees will default on loans.
The Victorian economy represents around a quarter of Australia's GDP. If most businesses are force to shutter for six weeks, the fallout will be felt well beyond the state's borders.
But before you hit the "sell" button on ASX banks, there's a chance the industry could dodge a bullet.
Should you sell ASX bank stocks now?
Daniel Andrews is pushing the federal government to offer extended support for the state – maybe by keeping the JobKeeper and JobSeeker at current levels till next year instead of tapering both programs.
There are reports that federal Treasurer Josh Frydenberg isn't keen on changing the rate. He may instead make it easier for Victorian businesses to qualify for the scheme.
Victoria is also expected to pump additional stimulus to keep households and SMBs from going to the wall.
There's still too much we don't know, so it's probably better to wait for more details before deciding on what to do with your ASX bank holdings.
One thing I do believe though is that CBA's share price will keep outperforming its peers in this fast-moving environment.
Most brokers have a "sell" rating on the stock as its valuation is significantly ahead of its peers. But the reason for this is because it's the safest of the big four.
At this point in time, it's worth paying more for safety.
