Event Core
ADI Performance: On 07 September 2021, the Australian Prudential Regulatory Authority (APRA) has published the Quarterly Authorised Deposit-taking Institution (ADI) Performance for the June 2021 quarter. The release states a considerable 23.5% PcP incline in net profit after tax, touching $32.3 billion and 2.1 ppts incline in total capital ratio, clocking 18.4%. ADI industry has manifested strong resilience with prudent capital and liquidity position.
Residential Mortgage Lending: Increasing house prices and a low-interest-rate environment resulted in an increased share of new lending. Residential mortgage (credit outstanding) inclined by 4.7% with debt-to-income levels inclining by 5.8 ppt, reaching 21.9%.
Key Lending Indicators Paving Way for ADIs and Mortgage Lending Business
The surge in Value of New Loan Commitments: Amidst the favorable government policies to combat the COVID-19 pandemic, new loan commitments for housing finance surged to $32.12 billion, up by 68.2% in July 2021 (YoY). Consequently, businesses’ construction finance increased by 28.1%, reaching $2.96 billion. As a result, in July 2021, the value of new loan commitments, the owner-occupiers stood above elevated levels and reported a 58.3% YoY uptick and 63.6% surge relative to pre-COVID levels.
Personal Finance Inclined: In July 2021, personal finance instruments showcased a 14.2% uptick, primarily driven by a 92.8% incline in personal investments and a 2.9% incline in automobile financing.
Business Financing Yet to Touch Saturation Point: In July 2021, businesses showed increased credit appetite both for construction and purchase of property, indicating a solid expansion by Australian firms. Asset purchases showed astonishing 136.3% growth (YoY), clocking $7.55 billion.
Figure 1: Uprise in New Loan Commitments in Personal Fixed Term Loans:
Source: Based on The Australian Bureau of Statistics, Analysis by Kalkine Group
Key Developments in ADI
Prudent Liquidity Position: For the June 2021 quarter, APRA reported a 4.9 ppts PcP decline in liquidity coverage ratio, which stood at 132.6%, with minimum liquidity holdings ratio declining to 18.6%, a fall of 0.5 ppts. ADIs strong liquidity position resulted from considerable monetary support and a consequent uptick in lending activities.
Resilient Profitability and Asset Base: For June 2021 quarter, total assets inclined by 1.0% PcP and stood at $5,382.7 billion, and the total capital base surged by 11.5%, reaching $387.1 billion. In line with significant government stimulus packages, ADIs recorded a net profit after tax for the year ended at $32.3 billion, up by 23.5% PcP.
Other Key Statistics Upholding the Industry: For June 2021 quarter, ADIs reported $2,106.3 billion in total risk-weighted assets, a fall of 1.1% PcP. In addition, the impaired assets and past due items assumed a fall of 4.0% PcP and touched $37.5 billion.
Figure 2: ADI’s Profitability Support:
Source: Based in Australian Prudential Regulation Authority Data, Analysis by Kalkine Group
Key Updates on Residential Mortgage Lending Activities
Key Statistics on ADI’s Activities in Residential Mortgage Space: Credit outstanding in residential mortgages inclined to $1,935.2 billion, up by 4.7% PcP. Primarily driven by an 8.7% PcP hike in owner-occupied mortgage lending and secondarily driven by a marginal hike of 0.1% PcP in investment mortgage lending activities.
New Residential Mortgage Loans Funded: For the June 2021 quarter, the new residential mortgage loans funded uplifted by 40.5% and touched $156.2 billion. Owner-occupied mortgages assumed the highest weightage of 70.6%, up by 1.5 ppts, in total new residential mortgage loans. On the other hand, investment mortgages’ weightage declined by 1.4 ppts and stood at 27.8%.
Other Key Statistics Upholding New Residential Mortgages: The total share of debt-to-income above or equal to 6x inclined significantly to 21.9%, up by 5.8 ppts, significantly attributed to the high sustainability of the low-interest-rate environment. Total commercial property limits inclined by 3.7% and stood at $369.1 billion. Consequently, total commercial property exposures inclined by 3.9% and stood at $312.5 billion.
Key Risks and Challenges
Although ADIs have manifested significant resilience, the global pandemic has not ceased yet, and therefore, systematic risks are dominant. First, the unwinding of the HomeBuilder Grant resulted in consecutive sequential declines in home loan financing activities. Financial operations in a low-interest-rate environment may present repricing risk to the ADI industry. Business loans may be affected by the retrenchment of relief policies introduced by the government in pandemic times. Finally, gradual phase-out of stimulus effects may impact ADIs profitability support under uncertain circumstances.
Figure 3: Key Risks and Challenges:
Source: Analysis by Kalkine Group
Outlook
In FY21, the Australian economy expanded by 0.7%, showcased by a 1.4% incline in GDP. The Reserve Bank of Australia (RBA) has reduced the cash rate to 0.1% on 3 November 2020, which boosted cash flows for businesses and lending activities. In the recent policy news, RBA has extended its bond-buying program for $100 billion to February 2022. While it had reduced the quantum of bond-buying to $4 billion a week (from $5 billion). This will provide impetus to the economy and speed up the revival. Besides, the RBA has put a comprehensive set of monetary policies to support the supply of credit and lower funding costs. Resilient wage growth has delivered a significant contribution to superannuation funds which signals a recurring incremental trend. Considering the developments in ADIs, we have figured out four stocks on ASX that are set to see the momentum.
(1) Liberty Financial Group (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.08 billion, Annual Dividend Yield: 0.00%)
Strong Liquidity Position Achieved with Growing Funding Vehicles: Liberty Financial Group (ASX: LFG) is a financial services company and is engaged in speciality lending, insurance broking services, insurance underwriting and management of funds in the ANZ region. In FY21, LFG reported NPAT of $185.4 million, a movement of +38% YoY. Portfolio assets are inclined to $12.3 billion due to the strong resilience manifested by LFG’s business partners and customers. As a result, the leverage ratio inclined to 13.1x in FY21 relative to 12.7x in FY20 and return on assets surged by 70 bps and stood at 1.9%.
In FY21, LFG registered a 17% growth in new loans, which stood at $4.1 billion amidst a marginal decline in customer base to 0.7% of the portfolio as of 30 June 2021. In addition, LFG incorporated eight new funding vehicles, which raised $4.9 billion in new liquidity. From an operational standpoint, the cost-to-income ratio declined by 190 bps and stood at 22.8% and NIM inclined by 43 bps and stood at 3.08%. LFG holds $604 million in cash and $12,239 million in financial assets. Net assets were registered at $1,038 million relative to $1,009 million in FY20.
Outlook: LFG is expected to retain a distribution payout of 40-80% of NPAT. The reducing borrowing costs shall pose significant support to NIM. LFG aims to expand the auto finance solutions. The continued investments in improving customer experience may bring forward a customer base expansion.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs LFG (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of LFG went down by ~0.725%. The stock made a 52-weeks' low and high of $6.600 and $8.350, respectively. The stock underperformed the market volatility index. The stock has been valued using the Price/Book Value multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peer's average, high NIM growth potential. For valuation purposes, peers like Steadfast Group Ltd (ASX: SDF), Genworth Mortgage Insurance Australia Ltd (ASX: GMA), Australian Finance Group Ltd (ASX: AFG) were considered. Considering the highly resilient industry, improved prospects for monetary support, higher operational efficiency, and valuation, we give a 'Buy' rating on the stock at the current market price of $6.850, down by ~0.437% as of 13 September 2021.
(2) Resimac Group Ltd (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 865.81 million, Annual Dividend Yield: 3.01%)
Resilient Investment Vehicles and Multi-Channel Reach Exhibits Growth Prospects: Resimac Group Ltd (ASX: RMC) operates a residential mortgage lender and multi-channel distribution business, which specialises in prime and speciality lending. In FY21, RMC reported $107.6 million in statutory NPAT, up by 92% YoY, and net interest income of $242.7 million, up by 29% YoY. Normalised NPAT increased by 87%, primarily driven by high asset under management and increased net interest income. Cost-to-Income ratio declined by 580 bps due to top-line growth, partly offset by investments in core banking transformation.
Home loan settlements increased by 3% YoY, driven by New Zealand (up by 81% YoY) and homeloans.com.au (up by 15% YoY). Home loan assets under management increased by 11% YoY, and direct to consumer channel, via homeloans.com.au, increased its spread by 10% and reached $1.9 billion. RMC’s NIM increased by 17 bps, significantly attributed to BBSW and partly offset by home loan pricing and funding costs. In FY21, RMC issued $5.8 billion of Australian and NZ Prime and Speciality RMBS at lower funding costs.
Outlook: Resimac home loans and homeloans.com.au target over $8 billion in annual settlements by FY24 via building a low-cost orientation model, high conversion and customer retention, brand recognition, and offering flexible lending solutions. Resimac asset finance targets over $1 billion in annual settlements by FY24 with a comprehensive product suite, repeat ABS issues, and lending commercial and consumer asset financiers.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs RMC (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of RMC went down by ~8.974%. The stock made a 52-weeks' low and high of $1.255 and $2.800, respectively. The stock underperformed the market volatility index. The stock has been valued using the Price/Book Value multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peer's average, considering improved NIM, multi-channel operations, and increase assets under management. For valuation purposes, peers like NIB Holdings Ltd (ASX: NHF), Australian Finance Group Ltd (ASX: AFG), Liberty Financial Group Ltd (ASX: LFG) were considered. Considering the improved operational performance, improved customer reach, broader operations into home loans and asset finance, and valuation, we give a 'Buy' rating on the stock at the current market price of $2.130, up by ~0.471% as of 13 September 2021.
(3) Bendigo and Adelaide Bank Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 5.37 billion, Annual Dividend Yield: 5.65%)
Improved Commercials Present Expansion Phase: Bendigo and Adelaide Bank Limited (ASX: BEN) provides retail banking such as personal, business, wealth, and community banking services. In FY21, the customer count surged to 2.06 million compared to 1.88 million in FY20. Total lending growth touched 10.6% relative to 2.1% witnessed by other major banks. The cost to income ratio significantly declined to 60.3% relative to 62.7% witnessed in FY20 due to continued reduction in CTI ratio. Return on tangible equity increased to 10.17% relative to 7.42% in FY20.
Consumer division contributed $454.9 million total cash earnings due to a 3.3% increase in income at reduced operating expenditure, down by 2.5%. Business division and agribusiness division contributed $175 million (Income up by 7% and opex down by 10.7%) and $90.6 million (income up by 14.3% and opex down by 3.5%) to total cash earnings, respectively. As a part of BEN’s digital strategy, BEN is expected to settle the acquisition of Ferocia Pty Ltd for up to $116 million by Q2FY22 to develop digital customer experiences.
Outlook: BEN expects continued lending growth, primarily attributed to residential lending activities. The cost-to-income ratio is estimated to increase due to continued reduction in CTI ratio, and cash operating expenses are estimated to increase by ~3%. Asset quality remains intact with favourable macro factors.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs BEN (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of BEN went down by ~13.874%. The stock made a 52-weeks' low and high of $5.800 and $11.680, respectively. The stock underperformed the market volatility index. The stock has been valued using the Price/Book Value multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at some discount compared to its peer's average, considering reduced market share and increased cost to income ratio expectations. For valuation purposes, peers like Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ), Humm Group Ltd (ASX: HUM) were considered. Considering the improved liquidity position, increased NIM, continued loan growth expectations, and valuation, we give a 'Hold' rating on the stock at the current market price of $9.560, down by ~0.830% as of 13 September 2021.
(4) CCP (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.08 billion, Annual Dividend Yield: 2.32%)
Considerable Investment Prospects Drives Operational Improvements: Credit Corp Group Limited (ASX: CCP) operates in the debt collection and consumer lending industry, offering debt sale, local government debt recovery, and hardship and insolvency management services. In FY21, CCP registered $88.1 million in NPAT, up by 11% YoY with strong results from the US segment. The company reported a near-record purchased debt ledger investment outlay of $293 million. The pre-tax operating cash flows stood resilient at $217.4 million relative to $212.3 million in June 2020.
The PDL carrying value was $467.3 million relative to $422.6 million in FY20, mainly achieved with limited organic purchases due to reduced PDL supply. The sustainable investment capacity, cash and undrawn lines amounted to $372 million. The acquisition of Collection House PDL book contributed product lifts in segment productivity and earnings of 9% and 11%, respectively. The US debt purchase business remained the most significant single contributor to FY21 earnings growth. Operational improvements and elevated purchasing produced a 26% surge in collections.
Outlook: PDL acquisition stands at the cost of $200-240 million. CCP expects NPAT to vary between $85 million and $95 million. CCP secured a record commitment in the PDL investment pipeline for FY22 amidst growth charge off volumes.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs CCP (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of CCP went down by ~0.635%. The stock made a 52-weeks' low and high of $16.160 and $34.480, respectively. The stock outperformed the market volatility index. The stock has been valued using the Price/Book Value multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at some discount compared to its peer's average, considering a considerable investment outlay. For valuation purposes, peers like WISR Ltd (ASX: WZR), Money3 Corp Ltd (ASX: MNY), Zip Co Ltd (ASX: Z1P) were considered. Considering the improved liquidity position, incline in PDL carrying value, improved operating metrics, and valuation, we give a 'Hold' rating on the stock at the current market price of $31.290, up by ~0.968% as of 13 September 2021.
Comparative Price Chart (Source: REFINITIV)
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decisions should be made depending on investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock of the Target Price mentioned as per the Valuation has been achieved and subject to factors discussed above.
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