Geopolitical events have raised fresh concerns about the outlook for banks locally and globally.
Geopolitical events have raised fresh concerns about the outlook for banks. In Morgan Stanley’s research view, risks for Australian banks are generally lower than risks for banks in other regions. At this point, Australian analysts are more focused on the implications for margins and trading multiples than for loan growth and credit quality.
Morgan Stanley’s Macro+ team sees only a small impact on Australian GDP as the tight labour market, excess savings and commodity exports provide buffers against higher fuel costs. With headline inflation likely to increase sharply, our strategists think the Reserve Bank of Australia remains on track to lift cash rates in the fourth quarter. This timing has been reflected in our analysts’ forecasts, with no material margin benefit until the second half of 2023. However, the earlier path of rate rises implied by market pricing would bring this benefit forward.
Credit markets are volatile, and spreads have widened across all types of public market issues recently. Morgan Stanley analysts think the potential for higher funding costs is the largest risk and greatest source of uncertainty for Australian banks arising from the current environment. Their forecasts assume that wholesale funding costs become a headwind for bank margins in the second half of 2023, but also note that an extra 25bp increase in the cost of new term debt issues over the next 3 years would reduce margins by an average of ~2-3bp. Just as importantly, every 25bp rise in term deposit rates relative to the cash rate is a ~3-4bp drag on margins.
Morgan Stanley analysts think the headwind from mortgage mix shift and fixed rate mortgage pricing will ease in the second half of 2022, but industry feedback suggests that competition for variable rate loans remains intense.
The combination of a resilient economy, strong labour market and healthy business conditions suggests little risk to our analysts’ average major bank loan growth forecast of ~6.5% this year, while forecasts for next year are conservatively set at ~3-4%.
The Morgan Stanley research team has previously identified six factors that mitigate potential credit quality risks, and they don't expect these to be a concern for investors in 2022. What's more, their forecasts assume that underlying loss rates will rise from <4bp of loans in the 2021 December quarter to ~13bp in the second half of 2022 and ~14-15bp next year. These account for some impact from supply chain disruption, higher labour costs, rising commodity prices, the east coast floods and more modest global growth.
Overall, the view of Morgan Stanley’s analysts is that, while risks for Australian banks have increased, they are largely captured in our estimates or reflected in current trading multiples.
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