Daily Commentary BY THE CURVE TEAM –

Markets Optimistic Yet Bank Provisions Grow

28th of April, 2020

Markets for the most part have been relatively optimistic over the last few days in a clear juxtaposition to large companies putting aside funds in Covid-19 provisions.

As people start thinking about the road out of the lockdowns the market response especially in equities has been quite buoyant. Similarly, in bond markets spreads have somewhat normalised and liquidity in the banking sector as a whole is high. On the face of it those three things point to a rosy picture of the immediate economic outlook.

However, banks have begun putting aside large volumes of funds in provisions for losses on defaulting loans. We saw the first hard data of this yesterday in results for NAB with a $800M provision. We have seen similar steps taken offshore with large US banks making similar provisions.

Whilst it can certainly be argued that provisions are simply a prudent step and the funds may not be needed as the losses may not eventuate. This is still a clear juxtaposition to market sentiment. Covid-19 is a health crisis that has led to an economic crisis, and whilst the first may be nearing the stability, and all hope that is certainly the case, the economic implications remain very uncertain.

Until restrictions are eased and consumers begin going about their business once again we will not know what the new normal is. It is likely that a significant change in behaviour will result but just how and where in the economy this will materialise will determine on the shape of the recovery over the next few months and years.

Matthew Dunshea

Client Relationship Manager