The Wrap: Vaccinations, Oz Banks, Consumption

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Weekly Broker Wrap: Vaccine rollouts critical to easing Sydney’s restrictions; Oz banks limited upside; consumption benefits from excess savings

-Sydney could remain in lockdown for another nine weeks
-Macquarie sees upside risk to banks balance sheet growth in second half FY21
-Powerful two-year rebound in consumer spending growth predicted on back of excess savings

By Mark Story

Vaccinations: Sydney could lockdown until early October

Based on recently announced vaccination thresholds for reopening international borders, the Australian government outlined two possible scenarios: To restore arrival caps and ease restrictions on vaccinated arrivals. Phase B requires 70% of adults (56% of the total population) to be vaccinated.

Then there’s Phase C which allows for unrestricted travel for vaccinated Australians once 80% of adults (64% of the total population) are vaccinated.

Jarden believes both thresholds are potentially achievable by year-end. However, given the risks of vaccine hesitancy and the requirement for all states and national averages to achieve thresholds simultaneously, the broker estimates the Phase C 80% threshold is more likely to be reached by early-2022.

Having used the run-rates of nations more advanced in their rollouts as a guide, Jarden now expects the 70% threshold for Phase B to be achieved by November/December 2021 and the 80% threshold for Phase C to be achieved by January/February 2022.

Critical months for vaccine supply will likely be September and October as the Government looks to receive and then distribute the bulk of Pfizer supply which is expected to dominate the back end of the rollout. Jarden notes any material change in the timing of that supply could shift the broker’s vaccine rollout assumptions.

While the requirement for states to also achieve vaccination thresholds will cause a delay, Jarden expects it to be mitigated by the federal government's ability to prioritise supply for states falling behind, and incentives to stimulate vaccination rates.

Given that the key to easing Sydney’s restrictions is vaccinations, Jarden suspects the city may remain in lockdown until the 70% threshold is reached somewhere between late-September to early October.

While the recent uptick in vaccine demand – driven by Sydney's outbreak – suggests a decline in hesitancy towards AstraZeneca, Jarden notes the uptake as a percentage of total vaccines administered remains relatively low at approximately 8% over the period.

However, this figure does not include uptake in over 60s which the broker suspects is likely to slow given the already high vaccination rates in this cohort. As of 31 July 2021, 91% of over 70s have already had their first dose and approximately 80% of 60-70s have already had their first dose.

As of 2 August 2021, 41.6% of the Australian adult population had received one vaccine dose and 19.3% two doses. By vaccination rate, the lowest states are QLD and WA at 37.4% and 37.4% first dose and 16.3% and 18.5% two doses, respectively.

Overall, Jarden sees see the marginally lower than expected thresholds as an incremental positive for travel-exposed stocks like Flight Centre ((FLT)), Sydney Airport ((SYD)), and Qantas ((QAN)), and more mixed for retail and consumer-exposed stocks.

While the reduction in restrictions and lockdowns from the move to Phase B should generally be positive for the sector, the broker suspects the reopening of borders and international travel could be a drag on consumer spending, particularly on discretionary goods, next year as consumers reallocate their spending.

While equity markets have not reacted to the Delta variant, E&P Corporate Advisory believes caution is warranted over coming months. Having researched individual stocks and sectors, E&P’s analysts have some concerns in discretionary retail, malls, and casinos.

Assuming NSW lockdowns last for a couple of months, and the SE Qld lockdown is only 1-2 weeks, E&P expects the downside risks for discretionary retail’s FY22 earnings to be relatively modest at -2-3%. However, the advisory firm suspects negative sentiment towards July sales results – reported during upcoming results – could impact share price levels.

Meantime, E&P expects malls to be the most affected given the leverage to discretionary retail and cites REITs like Scentre Group ((SCG)) and Vicinity Centres ((VCX)) as most likely to be impacted.

While there will be negative effects for Qantas ((QAN)) and Transurban Group ((TCL)), the advisory firm expects pathology companies – notably Sonic Healthcare ((SHL)) and Healius ((HLS)) to remain major winners, while supermarkets will benefit although not to the same degree as last year.

While there is some risk of negative sentiment for the banks, E&P expects the impact on earnings should to negligible.

E&P Corporate Advisory is a related entity of Evans and Partners Pty Ltd.

Oz banks: Will lockdowns rain on the credit party?

While balance sheet growth trends have been on an upward trajectory, Macquarie questions what impact current lockdowns and economic uncertainty will have on revived momentum.

With banks underperforming by a further 3% in July, Macquarie sees limited upside in bank results, as drivers appear well understood. While the key potential positives are volume growth and capital generation, in the near term, with the macro tide turning, the broker sees risk to the sector’s performance.

However, Macquarie recognises the likelihood of relative valuation support and longer-term upside if inflation concerns re-emerge. Overall, the broker has a neutral view on the banks' sector and prefers National Australia Bank ((NAB)) – Outperform and target price of $28.00 – while noting risk to the CommBank ((CBA)) valuation premium – Underperform and target price of $88.50.

The broker also maintains a preference for the regionals over the majors.

Housing credit growth continued to improve in June to 8-9%, with three of the big four banks delivering double-digit annualised growth in June. While the current lockdown is likely to dampen growth in the fourth quarter, Macquarie believes these trends, ANZ Bank ((ANZ)) excluded – Outperform and target price of $29.50 – provide upside risk to balance sheet growth in second half FY21.

Macquarie sees structural pressure on business margins from competition and increasing broker-driven flow, with current margins appearing resilient. On the housing front, the broker notes competition and additional flow to fixed loans – now greater than 50% of flow – are putting ongoing pressure on margins.

The overall front-book variable rate now stands at 2.4%, around 14bps lower than in first-half FY21.

Macquarie observes limited changes in retail deposit pricing in July, while the broker’s proxy for large stable deposits declined by -4bps. While Macquarie expects majors’ deposit mix benefits to continue in the next quarter, the broker notes the impact on margins from liability pricing is diminishing.

While the majors are now growing ahead of system – with CommBank and NAB continuing to grow business share ahead of peers – the key exception, notes Macquarie, is ANZ due to persistent processing issues.

While clearly negative for ANZ’s growth, the broker suspects anaemic balance sheet trends are likely to result in better margin performance in second half FY21.

Meanwhile, the regionals – which are continuing to reduce their front book pricing – continued to take share with Bendigo & Adelaide Bank ((BEN)) – Outperform and target piece of $11.00 — and Bank of Queensland ((BOQ)) –  Macquarie restricted — growing mortgages at 2.1x and 1.9x, respectively. However, Macquarie notes ME Bank’s mortgage growth continues to lag system at 0.5x. ME Bank was recently acquired by Bank of Queensland.

Consumer spending rebound: Don’t write it off

Despite near-term downside risks due to the rise of the Delta variant, Oxford Economics believes warnings of a faltering consumer recovery in advanced economies look premature. The forecaster expects 2021 and 2022 to experience a very powerful rebound in consumer spending growth.

While the US consumer recovery has been the most impressive, Oxford expects G7 consumer spending to rise by 6.4% this year and 5.5% next year – the fastest back-to-back rises since the early 1970s.

Underscoring Oxford’s outlook is the rapid growth in household net worth, with advanced economy households now sitting on a large pile of excess savings accumulated over the last year.

While total consumption remains below early 2020 levels in most economies, the best picture is in the US, where total consumption in May was back in line with the pre-pandemic trend. However, the forecaster notes there is still a large, accumulated consumption “loss” over the past year or so – amounting to around -US$800bn – with consumer spending needing to keep growing strongly to wipe this out.

In light of this consumption loss, coupled with soft US retail sales data over the past two months, plus a broader levelling off in spending, Oxford admits there are near-term downside risks to its consumer spending forecasts from the rise of the Delta variant.

But while some sectors such as tourism will continue to drag until the pandemic is over, Oxford remains comfortable with its forecasts for consumption for several key reasons. Firstly, the forecaster believes it would be wrong to read too much into a few recent softish data points, with short-term surges in some sectors sometimes giving way to retreats.

Secondly, while the rise of the Delta variant implies a bumpy return to normality than hoped for two months ago, Oxford notes vaccinations are on the rise in the advanced economies, hence the underlying force behind reopening remains present.

Then there’s the release of excess savings accumulated during the past year, which Oxford expects will lend powerful support to spending. The forecaster also expects consumption to be boosted by sharp rises in household wealth and notes US household net worth rose $19 trillion from the end of 2019 to first quarter 2021, the strongest in decades.

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