In Brief: Inflation, Property Sentiment, Bank Buybacks, Gaming Regulation

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

Weekly broker wrap: impacts of further fiscal support, low property sentiment, declining bank equity, gaming regulatory concerns.

-Fiscal support could slow fall in inflation
-Property sentiment remains low amid rate rising
-Analysts predict buyback programs from the major banks in coming years given rapid equity decline
-Regulatory concerns not enough to dampen anticipated customer spend growth

By Danielle Austin

Further fiscal support an impediment to inflation recovery

Oxford Economics predicts fiscal support in advanced economies could slow the fall of inflation. Many of the fiscal support programs implemented throughout the pandemic have ended, but with wage increases not keeping pace with inflation, Oxford Economics sees signs of some economies looking to re-introduce fiscal support measures.

Inflation has taken surprisingly little impact on retail sales despite noises of poor consumer confidence, with consumers buffered in the early days of the inflationary cycle by the higher savings accumulated throughout the pandemic, as a result of fiscal intervention.  The economists expect the real-wage squeeze, slowing retail sales and falling commodity and producer prices to be all positive signs of slowing inflation, but warns further fiscal support is a real threat.

The UK energy price cap policy, and similar programs being implemented throughout Europe, is an early sign of mis-calibrated fiscal support, according to Oxford Economics.

[Note: Report published ahead of announced fiscal measures from new UK government.]

Interest rates high, property sentiment low

Higher interest rates, and the impending prospect of further hikes, has seen property sentiment remain low. According to ANZ Bank’s September quarter property council survey, residential property sentiment largely remained flat at low levels, while commercial property sentiment did experience a small rise.

While the Reserve Bank issued its fifth consecutive cash rate hike in early September, lifting the rate to a seven-year high of 2.35%, 90% of ANZ Bank’s survey respondents are anticipating interest rates to climb higher. Many of these respondents also expect further cost increases and increased difficulty in accessing financing to be a result of the rate rising cycle.

The survey results highlighted that while firms remain pessimistic about the broader economic outlook, they are more upbeat about their own prospects. In line with this outlook, many respondents remain positive about their own staffing levels and forward work schedules.

Likely buybacks across domestic banking industry in next year

Citi sees the possibility for further share buybacks within the domestic banking industry in 2024 given the decline in excess capital held by banks. Recent months have been expensive for the banks from a capital perspective, with the industry experiencing a -120 basis point decline in CET1 (common equity tier) ratios over the last year, equivalent to $21.5bn of CET1.

The Australian Prudential Regulation Authority (APRA) is set to implement revised capital standards from the beginning of 2023, which will expect the majors to operate with CET1 ratios above 11%. Citi assumes CET1 ratios to settle around 11.5% following the implementation of these standards, rising to 11.9% by the second half of FY24.

The broker also assumes buybacks equal to 30 basis points, with 10 basis points related to CommBank’s ((CBA)) residual $1.5bn buyback in the first half of FY23. The broker anticipates both National Bank ((NAB)) and Westpac Bank ((WBC)) to announce $2bn buybacks in FY24, reflecting capital adequacy from National Bank and benefits of divestments from Westpac Bank. Citi finds it possible these assumptions could be conservative.

Regulatory concerns plague slot market

While analysts remain optimistic as to the resilience of the gaming sector in economic downturns, the impact of potential increased regulation continues to dampen outlooks. Regulatory concerns have increased in the last year according to JP Morgan's annual slot market survey, with 42% of survey respondents naming additional regulations as their top concern in 2023. Rising interest rates and cost of living pressures were also named as top concerns for operators. Further, 88% of participants expect tightening regulations to have an impact on operations.

Despite this, JP Morgan expects the industry to benefit from per-player expenditure increases. A 6% customer spend growth run-rate is anticipated to continue into 2023, with expectations for machine price growth as its highest levels since 2018.

JP Morgan describes the industry as remaining competitive, but Aristocrat Leisure ((ALL)) does remain a clear leader, with 88% of respondents ranking its as the top performing manufacturer. While Aristocrat Leisure held onto its leading position for the fourth year in a row, the broker did highlight that difference between the remaining top five operators was negligible.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms