Weekly Reports | Mar 27 2023
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This story was originally published on 24 March 2023. It has now been re-published to specify numbers in USD while also correcting grammar and typos.
The weekly broker wrap: lending in the US expected to tighten, domestic insolvencies likely ahead, Amazon puts the squeeze on existing retailers.
-Lending standards are likely to tighten in US banking amid recent collapses
-Industry is warned to prepare for the impact of a slate of insolvencies that could emerge over 2023
-Amazon continues to solidify its domestic presence, putting pressure on incumbent retailers to hold on to market share
By Danielle Austin
Domino effect expected to impact on US banks, could impact on economic growth
The full impact of a number of North American banking institutions collapsing recently is still expected to topple through the industry, says Oxford Economics. It warns of potential flow-on impact on economic growth, predicting the strain on smaller banks to mount and lead to an eventual tightening of lending standards and subsequent reduction in the availability of credit.
While Oxford Economics continues to predict a mild recession in the second half of 2023, it points out tighter lending standards could cause a more painful downturn than previously expected. It predicts a peak drag on growth would occur three quarters after the implementation of tighter lending criteria, adding a level of risk to its forecasts for economic growth over the remainder of the year.
Unfortunately, visibility over the severity of a tightening in lending standards likely won’t be gained until stress in the banking sector normalises, warns Oxford. Oxford does, however, highlight early and aggressive policy response from the the Fed and Treasury should go some way in curtailing the emergence of a broader financial crisis, noting the Fed last week extended more than US$300bn in loans to banks in an afford to stabilise the banking system.
Further, Oxford Economics points out impact from the strain on small banks is unlikely to be even across the economy, with commercial real estate loans accounting for US$2 trillion of the US$4.5 trillion in loans on small banks’ balance sheets. With the remainder split between US$900bn in mortgage lending, US$800bn in commercial and industrial loans and US$500bn in consumer loans, these areas are likely to feel the impact of tightening loan conditions.
Concern around impending insolvencies on the rise
Law firm Taylor David has added its voice to mounting concern around a high level of insolvencies set to hit the Australian market. While global markets have struggled since the middle of last year, Taylor David says plenty of room to fall remains.
Just last week investors were reminded by Jarden of the risk of insolvency looming over the construction sector, as well as domestic tourism, aged care and hospitality. Taylor David has warned that financial uncertainty is facing businesses across all sectors, and expects the number of companies set to face financial headwinds exceeds that of the Global Financial Crisis.
Taylor David did point to construction, manufacturing and logistics as likely to feel the impact of insolvencies the most, noting these sectors are cyclically prone to insolvencies.
Additionally, the law firm has pointed to a rise in personal insolvencies in January, with 772 new formal personal insolvencies filed compared to 612 in the previous month, as interest rate rises, inflation and cost of living continue to impact on both business and households.
With more than half of fixed-rate mortgages expected to expire in 2023, Taylor David expects the sudden increase in mortgage repayments to have significant impact on households and the wider economy.
Amazon makes its presence known, increasing risk for retail peers
With Amazon so quickly establishing scale in the Australian market, Jarden predicts the retailer could take more than a 20% share of incremental non-food sales over 2023.
To date, ongoing strength in the domestic retail environment and supply chain issues have seen Amazon’s entry to the market have only a muted impact on incumbents, but the broker anticipates this will change in a more challenging retail period.
Over the last year, points out Jarden, Amazon lifted its gross merchandise value around 60% year-on-year to $4bn, exceeding the combined gross merchandise value of Accent Group ((AX1)), Beacon Lighting ((BLX)), Premier Investments ((PMV)) and Universal Store Holdings ((UNI)).
The majority of Amazon’s gross merchandise value stems from third party sellers, for which value increased 70% in the last year. The online retailer also became the most visited online store in early 2023, and continues to grow traffic at a compound annual growth rate of more than 20%.
With consumer spending weakening and supply chain issues easing, whilst at the same time consumers are, more than ever, utilising online to research, Jarden expects Amazon’s market share will only lift further.
Subsequently, risk for incumbent retailers is set to increase, with the broker pointing to electronics, home & garden and general merchandise retailers relying on third party brands, but without exclusivity, to be most at risk.
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