Key takeaway:

• Some of the key themes to watch across the 1H23 reporting season include margin growth and bad debts for the major banks, rising costs for miners, and any signs of a slowdown or margin pressure for retailers

The ASX may have started 2023 on a strong note, but the local share market now faces its first real test of the year with reporting season underway.

While some of the preliminary results that were published throughout January offer hope to investors, the real focus is what happens across the rest of the calendar year.

Amid expectations of further interest rate hikes, and an economic slowdown on the cards, guidance statements will take on a greater importance this year. Shareholders will also be scrutinising the ongoing impact of inflationary costs, and what it could mean for earnings, and in turn, dividends.

Here are three key themes to watch this ASX reporting season.

Bad Debts and Margin Growth for Banks

Rising interest rates are providing a buffer for the major banks to improve their margins, even with the prospect of slowing loan growth and potential bad debts on the horizon.

The key focal point in the banks' results will be net interest margins (NIM). Competition in the mortgage space has been a concern among the major players over the last couple years, so any signs of above system growth across lending operations could gain favour. 

In the context of the economic outlook, observers will scrutinise the banks' interest rate outlooks, with a view to understand what the looming mortgage cliff' might mean for their loan books. Any commentary around bad or doubtful debts is sure to draw significant attention.

If higher rates do flow through to an improvement in margins and overall profitability, investors will expect a lift in dividends, albeit rising costs and forward-looking growth are potential headwinds in the face of an uncertain economic outlook.

Cost Pressure and Valuations for Miners

With a number of resources stocks hitting record highs over recent months, including in the wake of China pivot from COVID-zero, mining sector earnings and valuations will likely attract attention.

By and large, names spanning iron ore, coal, and copper have outperformed increases in the respective commodities they follow. This could raise questions about whether valuations are sustainable, especially if commodity demand eases in line with expectations for a global economic slowdown.

Perhaps the biggest tell' for the mining and materials sector will be where companies see demand growth heading over the course of the year, and if this will be sufficient to maintain lofty dividends.

As far as challenges, miners have faced a range of issues, including but not limited to inflationary costs, labour shortages, supply chain difficulties, and currency movements. 

A number of companies in the midst of major developments have flagged cost overruns and blowouts, with higher costs proving an industry headwind. 

On this note, capital expenditure guidance may be looked at more closely than in years gone by. Operating costs should remain a focus given inflation currently sits at multi-decade highs, and has yet to show any signs of responding to the fastest monetary tightening cycle in recent times.

Changing Consumer Behaviour and Preferences for Retailers

If results from the banks don't provide a gauge on what is happening in the retail sector, then earnings from discretionary and essential retailers will lay bare the true story.

To the surprise of many onlookers, preliminary results from a host of ASX-listed retailers showed robust growth, contradicting ABS data that suggested a significant retail slowdown was in effect.

Discretionary retailers are the cohort that is arguably most exposed to rising interest rates, with the Reserve Bank of Australia not shying away from the fact it is actively trying to get consumers to rein in their spending.

Nevertheless, economists expect consumers to pare their spending with discretionary retailers, which means outlook commentary will be even more pivotal than figures from the second-half of last year, where rate hikes had yet to fully impact consumers.

On the other hand, the biggest question mark for retailers selling essential goods could be inflationary costs, and how effectively these costs have been passed on in order to preserve margins. While consumers may be less inclined to cut back on things like groceries, any shift in consumer behaviour or preferences could provide a telling picture on the confidence of the general public.