Event Core
The Australian Bureau of Statistics released the lending indicators for November 2021. The indicators illustrated a 6.3% sequential uptick (+33.2% PcP) for new loan commitments for housing. Additionally, the new borrowed-accepted loan commitments for personal fixed-term loans expanded by 4.5% sequentially (+22.3% PcP). In contrast, loan commitments for business construction slipped drastically by 35.2% sequentially, however, stood resilient with an uptick of 45.6% PcP.
Key Statistics on Lending Indicators
Housing Finance Rebounds: In November 2021, the value of new loan commitments for total housing clocked $31.4 billion, up by 6.3% sequentially and +33.2% PcP. Loan commitments value for owner-occupied housing surged by 7.6% and clocked $21.3 billion and for investor housing edged up by 3.8% sequentially, recording an all-time high of $10.1 billion.
Uplift in Personal Finance: In November 2021, the value of new loan commitments for fixed-term personal finance advanced to 4.5%, primarily driven by a 4.8% uptick in lending activities owing to the purchase of road vehicles. Additionally, new loan commitments for personal investment slipped marginally by 0.6%.
Business Finance Contacted: The value of new loan commitments slipped sharply by 35.2% and stood at $1.627 billion, accompanied by a 27.9% contraction in financing activities for the construction of dwellings.
Figure 1: Value of Total Loan Commitments (ex-refinancing):
Source: Based on Australian Bureau of Finance Data, Analysis by Kalkine Group
Construction and Building Activities to Promote Lending Activities
Value of Total Building Approved on a Rise: The value of total building approved surged by 14.8% in November 2021. The surge was primarily driven by a 28.3% rise in the value of the non-residential building, following a 20% decline in October 2021. Aggregate residential building value advanced by 7.1%, primarily attributed to an 8.5% uptick in the value of the new residential building, partially offset by 0.8% slippage in alterations and additions.
Figure 2: Private Dwellings Commencement (in Units):
Source: Based on Australian Bureau of Finance Data, Analysis by Kalkine Group
Dwelling Commencement Inclined: In June 2021 quarter, total dwelling unit commencements advanced by 23.2% and clocked 64,596 dwellings. New private sector house commencements increased by 13.7% to 40,820 dwellings. The value of total building work down slipped marginally by 0.2% to $30.3 billion.
Figure 3: National Housing Finance and Investment Corporation (NHFIC) Analysis on Housing Affordability:
Source: Based on National Housing Finance and Investment Corporation (NHFIC) data, Analysis by Kalkine Group
Key Risks and Challenges
The gradual unwinding of HomeBuilder Grants may result in near-term declines in loan commitments for housing finance. Interest rates are intended to be low while investors’ risk appetite is expanding; hence, some asset prices may seem overvalued, and a price fall can fabricate a potential increase in default rates. Seasonally adjusted work done in the engineering construction space has slipped by 2.3% in September 2021, largely affecting business finance. Financial operations in a low-interest-rate environment may pose repricing risk for banking space, with high sensitivity to the value of loan commitments. Financial stocks are highly susceptible to potential cyber-attacks and related events, giving rise to systematic business disruptions.
Figure 4: Key Drivers V/S Key Constraints:
Source: Analysis by Kalkine Group
Outlook
Housing Affordability Improves: As per NHFIC analysis, the housing affordability for first home buyers and renters has increased, signaling a potential increase in housing finance for investors and owner-occupiers.
Improved Financial Performance of ADIs: Authorised Deposit-taking Institutions (ADIs) net profit after tax surged by a substantial 73.2% over the year and clocked $36.4 billion for the year ended September 2021.
Finalization of a New Bank Capital Framework: The Australian Prudential Regulation Authority (APRA) has derived its new bank capital framework, to embed strong capital levels and align Australian standards with Basel III requirements.
Improved Funding Conditions Uncover Favourable MBS Issuance: Non-banks have advanced their housing lending segment since late 2020, post reducing the height of COVID-19 turmoil; improved funding conditions have increased the issuance of residential mortgage-backed securities.
Lending Activities Indicating Financial Stability: Financial market indicators suggest high investor confidence in the robustness of banks’ future earnings; banks’ Price-to-Earnings multiple ratios have inclined since the mid of last year, and the implied cost of capital has shrunk relative to other public companies.
Considering the uptrend in loan commitments and positive developments covering ADIs, we have figured out three stocks on ASX that are set to see the momentum.
(1) Pinnacle Investment Management Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.53 billion, Annual Dividend Yield: 2.22%)
PNI Bounces Back with Resilient Fund Performance: Pinnacle Investment Management Group Limited (ASX: PNI) is an investment management company based in Australia. The company’s principal activities include developing and operating investment management businesses and providing distribution services, business support, and responsible entity services. In FY21, NPAT attributable to shareholders stood at $67.0 million, up by 108% from $32.2 million in FY20. Cash and principal investments stood at $155.0 million as of 30 June 2021. CBA facility increased to $100 million from $30.0 million. Funds under management (FUM) for the period stood at $89.4 billion, up by 52% PcP.
In H1FY22, four Affiliates have crystallized performance fees aggregating to circa $18.0 million. PNI’s after-tax net share stands in the order of $6.2 million. PNI expects a net return on Principal Investments in order of positive $2.0 million. On 24 November 2021, PNI completed the $105 million fully underwritten institutional placement of circa 6.3 million fully paid ordinary share issue, equating to circa 3.3% of existing shares. The placement was completed at the share price of $16.70/share, demonstrating a 4.6% discount on the 22 November 2021 close. The proceeds will fund PNI’s investment in Five V Capital via the purchase of redeemable convertible preference shares.
Outlook: The highly regarded affiliates with robust international and local investment consultant ratings and diverse stable of affiliates ensure sound fundamentals for sustainable sales growth. Over a decade of the organic build-up of global investor network, infrastructure, and strategies demonstrate robust international distribution.
Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (Illustrative)
PNI Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of PNI went down by ~16.158%. The stock made a 52-weeks low and high of $7.030 and $19.290, respectively. The stock has been valued using the Price-to-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 peers, considering the recent rebound in equity markets and crystallized performance fees. For valuation purposes, peers like Hub24 Ltd (ASX: HUB), MA Financial Group Ltd (ASX: MAF), Netwealth Group Ltd (ASX: NWL), and others have been considered. Considering the improved level of funds under management, crystallization of four affiliates’ performance fees in H1FY22, favorable liquidity position, and upside indicated by valuation, we give a 'Buy' rating on the stock at the current market price of $12.880, as of 17 January 2022, at 12:35 PM (GMT+10), Sydney, Eastern Australia.
(2) Liberty Financial Group Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.66 billion, Annual Dividend Yield: 8.36%)
Strong Liquidity Position Achieved with Growing Funding Vehicles: Liberty Financial Group (ASX: LFG) is a financial services company and is engaged in specialty lending, insurance broking services, insurance underwriting, and management of funds in the ANZ region. In FY21, LFG reported Statutory 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 underlying return on assets surged by 70 bps
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 to Book Value Multiple Based Relative Valuation (Illustrative)
LFG Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of LFG went down by ~5.401%. The stock made a 52-weeks low and high of $5.200 and $8.300, respectively. 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 peers, considering high NIM growth potential. For valuation purposes, peers like Resimac Group Ltd (ASX: RMC), Genworth Mortgage Insurance Australia Ltd (ASX: GMA), Australian Finance Group Ltd (ASX: AFG), and others are considered. Given the highly resilient industry, improved prospects for monetary support, higher operational efficiency, current trading levels, upside indicated by valuation, and key risks associated with the business, we give a 'Speculative Buy' rating on the stock at the closing market price of $5.430, down by ~1.273% as of 17 January 2022.
(3) Bendigo and Adelaide Bank Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 5.15 billion, Annual Dividend Yield: 5.93%)
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 operating expenditure was down by 10.7%) and $90.6 million (income up by 14.3% and operating expenditure 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%.
Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (Illustrative)
BEN Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of BEN went up by ~5.341%. The stock made a 52-weeks low and high of $8.430 and $11.680, respectively. The stock has been valued using the Price-to-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 discount compared to its peers, considering high repricing risk and high capital adequacy requirements. For valuation, peers like Bank of Queensland Ltd (ASX: BOQ), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ), and others are considered. Given 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 $9.270, up by ~0.980% as of 17 January 2022.
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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