I. Sector Landscape
Globally, the financial services segment has remained resilient from the ongoing effects of the COVID-19 pandemic. Aided by expansionary monetary and fiscal policies, output has rebounded in most economies, especially those with the most progressive vaccination rollout programs. In Australia, households and businesses are robust financially to counter the Delta variant of COVID-19 and associated containment measures. Households have continued to build financial buffers, indicated by the high saving rate. Despite an uptick in debt-to-income (DTI) ratios, businesses have maintained sound lending standards.
Recent Update by RBA
Monetary Policy Decision: As per the meeting held on 2 November 2021, the Reserve Bank of Australia (RBA) board decided to maintain the cash rate target of 10bps with a 0% interest rate on exchange settlement balances. Further, RBA continues to purchase government securities at a reported $4 billion/week rate until February 2022. The board also decided to discontinue the target of 10bps for the April 2024 Government Bonds.
Key Macro Growth Drivers
Significant Resurgence in Household Spending: In June 2021 quarter, domestic demand contributed 1.6 ppts to GDP incline. Public and private demand surged, primarily attributed to a 1.1% surge in household spending and a 7.4% surge in public investments. The household saving ratio declined to 9.7% from 11.6% due to increased household consumption and a dip in gross disposable income.
Figure 1: Sharp Recovery in Household Spending with Corresponding Decline in Saving Ratio
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Constructive Lending Indicators: In September 2021, the value of new loan commitments for total housing surged by 35.5% PcP. Loan commitments of personal finance surged by 0.4% MoM for fixed-term loans and considerably 1.9% MoM for road vehicles. Regarding business financing, the total value of loan commitments for construction finance surged significantly by 13.0% amidst favourable policy support on housing and infrastructure development.
Figure 2: Significant Boom in Housing Finance Signaling Spike in Lending Activities
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Key Developments within Authorised Deposit-taking Institutions (ADIs)
ADIs Position of Repurchase Agreements (Repos): As part of RBA’s Bond Purchase Program and Term Funding Facility, Authorised deposit-taking institutions (ADIs) undertook repos with the RBA and sold bonds in return for deposit assets. The transactions culminated in $92.3 billion worth repos of issued bonds. Consequently, the total worth of acquisition in deposits by the RBA stood at $132.6 billion.
Assets Position on ADI’s Books: In September 2021, the total resident assets edged up by 0.3% or $16.7 billion. Cash and deposits with financial institutions held up the momentum with a 0.6% MoM or $2.7 billion increase. In addition, total securities assets widened by $2.2 billion or 0.3% MoM, representing a reasonable liquidity position.
Resilient Profitability and Asset Base: In September 2021, total resident loans and finance leases hiked by 0.6% or $17.7 billion, primarily driven by a $9.0 billion increase in owner-occupied housing lending. Non-financial business lending witnessed a considerable climb of 0.9% or $7.6 billion, strengthening business confidence and improved economic conditions.
Key Developments in Fintech Industry 2021
Industry Growth Witnessed in 2021: Fintech Australia estimates that the industry has expanded from $250 million in 2015 to $4 billion in 2021. Leading players, such as Zip and AfterPay, have expanded their horizons at the international level. Furthermore, global investment has powered growth in worldwide expansion and fintech exports.
Global Fintech Ranking: Australia climbed two places in the global fintech rankings. The country is now positioned sixth in the world and second in the Asia-Pacific region as mentioned in the release by Australian Trade and Investment Commission. The ranking upgrade reflects a vibrant fintech culture with increasing adoption among businesses, governments, and citizens.
Index Performance:
The ASX 200 Financials (GIC) Index posted 1-year returns of ~+43.34% compared to ~+22.53% by the ASX 200 Index. Increasing consumer spending, surged housing demand, favourable monetary support, RBA’s indication of tapering bond purchases as economy recovers to pre-pandemic levels have contributed to the sector growth.
Figure 3: The ASX 200 Industrials Index (GIC) outperformed the ASX 200 Index in the past one years by ~20.81%:
Source: REFINITIV as of 04 November 2021
Key Risks and Challenges
The fall in hours worked and output in the September quarter illustrated that the economic risks from the pandemic persist. The low long-term sovereign interest rates have continued to contribute to rising asset prices and increased risk-taking, potentially translating into an asset price bubble. The count of cyber-attacks continued to trend higher, driven mainly by amplified electronic payment services. Housing credit has spiked alongside solid growth in house prices; this may raise the risk of households becoming excessively leveraged and/, or housing loans quality on bank’s financial position deteriorate.
Figure 4: Key Drivers Vs Key Challenges
Source: Analysis by Kalkine Group
Outlook
RBA Drops Yield Target: The RBA board's decision to discontinue the yield target manifests improvement in the economy and progress towards the target inflation rate. The board is committed to sustaining supportive monetary conditions.
The uptrend in Household Expenditure: Total final expenditure by households broadened by 15.4% PcP in June 2021 quarter, signaling decent retail turnover growth potential. The savings ratio declined to 9.7%, which suggests increased propensity to consume, in turn building up retail volumes.
Support to DNDC Issuance and LCR Provision: The Lease Cost Routing (LCR) has allowed merchants the flexibility to process Dual-network Debit Card (DNDC) transactions via the least costly network for the merchant to drive down payment costs. Given its potential benefits, the RBA has strongly supported the provision of LCR and the issuance of DNDCs.
Increased use of Credit Cards and Embedded Options of BNPL Transactions: Electronic payments have largely replaced cash payments, primarily via credit cards. The recent uplift in credit card payments and increased integration with BNPL payment models are expected to manifold in coming years.
Promoting Digital Infrastructure: The Australian government announced Australian 5G Innovation Initiative program amounting to $20 million. In NBN wholesale markets, the total number of services stood at 8.4 million, up by 1.2%.
II. Investment theme and stocks under discussion (KSL, GMA, ANZ, BEN)
After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘Price/Book Value’ multiple method.
1. ASX: KSL (Kina Securities Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$242.46 million)
KSL operates as a diversified financial services company. KSL is based out of Papua New Guinea and provides share brokerage, fund administration, investment management, and other relevant services.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 18.89% on 04 November 2021. However, the stock might trade at a slight discount compared to its peers' average Price/Book Value (NTM trading multiple), considering the dissolution of the acquisition proposal to Westpac Bank PNG Limited. For valuation, peers like Bank of Queensland Ltd (ASX: BOQ), Westpac Banking Corp (ASX: WBC), Bendigo and Adelaide Bank Ltd (ASX: BEN) are considered. Considering health growth in loan books, progression in digitalisation, and valuation, we give a "Buy" recommendation on the stock at the current market price of $0.835, as of 04 November 2021, at 11:30 AM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 9.05%.
2. ASX: GMA (Genworth Mortgage Insurance Australia Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$940.53 million)
Genworth Mortgage Insurance Australia Limited (ASX: GMA) engages in the Loan Mortgage Insurance (LMI) business that offers LMI through flow and portfolio, primarily from a high loan-to-value residential mortgage in Australia.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 20.62% on 04 November 2021. However, the stock might trade at a slight discount compared to its peers' median Price/Book Value (NTM trading multiple), considering the impact of recent lockdowns and uncertain economic risks. For valuation, peers like Pepper Money Ltd (ASX: PPM), Humm Group Ltd (ASX: HUM), AMP Ltd (ASX: AMP) are considered. Considering the current trading levels, decent balance sheet position, expected improvements in the housing market, strategic borrower support programs, and indicative upside in valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $2.280, as on 04 November 2021, at 10:56 AM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 2.19%.
3. ASX: ANZ (Australia and New Zealand Banking Group Limited)
(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$81.05 billion)
ANZ is engaged in providing an array of banking and financial products and services. The company’s Australia and New Zealand segments are involved in both commercial and retail baking.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 7.73% on 04 November 2021. Moreover, the stock might trade at a slight premium compared to its peers' average Price/Book Value (NTM trading multiple) given improved cash profits and net interest margins. For valuation, peers like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) are considered. Considering the resilient liquidity position, improved net interest income to average credit risk-weighted assets ratio, and valuation, we give a “Hold” recommendation on the stock at the closing price of $28.720, up by ~0.878% on 04 November 2021. In addition, the stock has delivered an annualised dividend yield of 4.98%.
4. ASX: BEN (Bendigo and Adelaide Bank Limited)
(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$5.21 billion)
Bendigo and Adelaide Bank Limited (ASX: BEN) provides retail banking such as personal, business, wealth, and community banking services.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 9.28% on 04 November 2021. However, the stock might trade at a slight discount compared to its peers' average Price/Book Value (NTM trading multiple), given the reduced market share. For valuation, peers like Bank of Queensland Ltd (ASX: BOQ), Westpac Banking Corp (ASX: WBC), Humm Group Ltd (ASX: HUM) are considered. Considering the improved liquidity position, increased NIM, continued loan growth expectations, and valuation, we give a “Hold” recommendation on the stock at the closing price of $9.420, up by ~1.508% on 04 November 2021. In addition, the stock has delivered an annualised dividend yield of 5.87%.
Note: All the recommendations and the calculations are based on the closing price of 04 November 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decisions should be made depending on the investors' appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.
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