In Brief: Banks, Chinese Economy, US Business

Weekly Reports | Sep 09 2022

Weekly broker wrap: widening gap between near- and medium-term banking outlooks, China lacks growth drivers, US executives fail to find upside for profits.

-Analysts predict upside for banks is limited as covid benefits continue to unwind
-A declining working population, amid other factors, contributes to China’s weak growth outlook
-Business executives aren’t holding out hope for financial growth in the coming year

By Danielle Austin

Near-term positivity weighed by medium-term risk in banking sector

While Macquarie analysts expect banks to continue to benefit from rising rates and lagging term deposit pricing in the next six months, the outlook beyond that is less positive. The broker notes a marked difference in the short and long-term outlooks for the sector.

The broker sees upside risk to first half margin forecasts, which should be supported by rising rates and lagging term deposit pricing. Beyond this, Macquarie's forecasts remain well below consensus, and while noting the sector should exit the first half well positioned, it finds little else to be optimistic about.

Macquarie bases its margin outlook on the partial unwind of covid benefits, anticipating rate rises to drive banks to offer more attractive and competitive rates. The broker also expects term deposit and saving spreads to normalise towards pre-covid levels.

Taking assumptions into account, Macquarie finds Commonwealth Bank ((CBA)) expensive but with likely near-term upside earnings risk. It considers National Bank’s ((NAB)) price to already account for most potential upside, preferring Commonwealth Bank. The broker also prefers ANZ Bank ((ANZ)) to Westpac Bank ((WBC)), noting ANZ Bank’s recent share price weakness. Within the regionals, Macquarie has a preference for Bendigo & Adelaide Bank ((BEN)) over Bank of Queensland ((BOQ)).

Growth outlook for China bleak amid ongoing labour force decline

Growth in China remains a key topic for economists, with Oxford Economics forecasting baseline growth to slow to 4.5% between 2020-2030, and to 3% between 2030-2040. China maintained a 9% growth rate in the two decades to 2019

Further, Oxford Economics sees potential for further downside risk to these forecasts given China’s ageing population, over-investment, productivity slowdown, and a weakening real estate sector. The economists noted China’s slowdown appears to mirror that of other Asian economies in previous decades, such as Korea and Taiwan, with the key difference being China’s lower gross domestic product per person. This will see China face a longer pathway to recovery than other economies.

China’s working age population has been in decline since 2016, and Oxford Economics expects it will continue to decrease -1% by 2030, and a further -11% by 2040. Given this, the economists suggest labour input cannot be relied upon to boost output over the next two decades, noting the region will likely look to continuing heavy levels of investment instead to support gross domestic product growth.

Source: Oxford Economics

This presents a further challenge, in that high levels of investment in recent years have undermined the efficacy of continued investment. Oxford Economics believes current elevated levels of investment are not enough to maintain gross domestic product growth, while prior investment leaves China with large amounts of debt.

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