Event Core

The Australian Bureau of Statistics (ABS) has released Australian National Accounts for June 2021 quarter with a critical focus on finance and wealth. During the period, household wealth inclined by 5.8% and stood at $13,433.7 billion; consequently, demand for credit inclined by $25.5 billion and stood at $78.6 billion. Australia’s net lending position remained resilient and inclined from $9.6 billion to $24.2 billion QoQ. With simultaneous economic recovery and rise in infrastructure building activities, capital investment as a proportion of GDP inclined to 22.8%.

Flow of Funds

Gross Fixed Capital Formation Supporting National Investments: National investments increased significantly to $131.2 billion in June 2021. Non-financial corporations’ investment inclined by $9.3 billion and stood at $54.7 billion. General government investment inclined by $7.6 billion and stood at $28.4 billion. Household investment inclined by $5.7 billion and stood at $45.1 billion.

Diversification in Overseas Portfolio Boosted Financial Investment: Australia remained a net lender of $24.2 billion in the ninth successive quarter. Primary contributors were $36.9 billion acquisition in rest of the world (ROW) equities, partially offset by an outflow of $7.7 billion in general government short-term securities held by ROW. In addition, Other Private Non-Financial Corporations (OPNFC), non-money market funds, and pension funds continued investments in overseas markets to diversify across economies.

Improved Households’ Net Lending Position: With the acquisition of $61.5 billion asset acquisitions, including $29.4 billion (net equity) in pension funds, households’ net lending position inclined by $16.0 billion. Continued improvements in the labour market led to net equity acquisition in pension funds.

Figure 1: National Net Financial Investment Position:

Source: Based on Australian Bureau of Statistics Data; Analysis by Kalkine Group

Update on Segmented Credit Demand

Credit Demand from Households: The demand stood strongest since June 2007, primarily driven by favourable housing market activities, which led to new housing loans. For the June 2021 quarter, the new residential mortgage loans funded uplifted by 40.5% (YoY) and touched $156.2 billion. As a result, owner-occupied mortgages assumed the highest weightage of 70.6%, up by 1.5 ppts, in total new residential mortgage loans.

Private Non-financial Corporations: Businesses continued favouring equity as a source of finance, particularly attracting funds from non-residential investors. As favourable policies and optimal operating conditions in the first half of FY21 largely preserved business cash flows, the immediate need for debt funds was limited.

Borrowings By General Government: The commonwealth government’s funding requirements declined as COVID-related financial support gradually closed in March and debt issuance stabilised. Loan borrowings by local and state governments stood at $7.7 billion, and bond issuance by the national government stood at $6.2 billion. For ongoing public infrastructure projects and increased health spending, state and the local government raised funds through respective central borrowing authorities.

Figure 2: Demand for Credit by Sector

Source: Based on Australian Bureau of Statistics Data; Analysis by Kalkine Group

Key Developments within 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 resulted in $92.3 billion worth repos of issued bonds. As a result, the aggregated worth of acquisition in deposits by the Reserve Bank of Australia (RBA) stood at $132.6 billion.

Amplified Activities in Equity Markets: ADI’s share of equity funding continued to incline amidst consecutive strong quarters in the domestic stock market. In the June 2021 quarter, ADI’s funding share from stocks and other equities stood at 14.5%, relative to 13.8% in the prior period. ADI’s deposit funding inclined by $41.9 billion, owing to additional inflow of private non-financial corporations ($29.5 billion), pension funds ($5.5 billion), and households ($5.4 billion).

Resilient Profitability and Asset Base: For June 2021 quarter, total assets of ADIs 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 ending at $32.3 billion, up by 23.5% PcP.

Key Risks and Challenges

The unwinding of the HomeBuilder Grant resulted in consecutive sequential declines in home loan financing activities. Bad debts are estimated to rise over the 2021 period as repayment deferrals move into arrears for a small share of loans and as fiscal support is reduced. Furthermore, cyber-attacks and related incidents are likely to give rise to financial losses and systematic implications in particular circumstances. Financial operations in a low-interest-rate environment may present repricing risk to the ADI industry. In addition, business loans may be affected by the retrenchment of relief policies introduced by the government in pandemic times.

Figure 3: Key Risks and Challenges:

Source: Analysis by Kalkine Group

Outlook

Financial market indicators suggest high investor confidence in the resilience 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 decreased relative to other public companies. Over the years, banks’ high profitability matrices have allowed substantial capital buffer to curtail financial losses; the CET1 capital ratio has climbed considerably above the minimum prudential requirements. On 6 July 2021, RBA announced its continued interest in purchases of government bonds amidst the completion of $100 billion of bond purchases in September 2021, which may lower the interest rate structure. The RBA has put a comprehensive set of monetary policies to support the supply of credit and lower funding costs. Non-banks have enlarged their housing lending segment since late 2020, post reducing the height of COVID-19 turmoil; improved funding conditions have given rise to increased issuance of residential mortgage-backed securities. Considering the developments in household wealth and lending, we have figured out four stocks on ASX that are set to see the momentum.

(1) Magellan Financial Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 6.86 billion, Annual Dividend Yield: 5.65%)

Generating Alpha by Riding on Equity Market Opportunities: Magellan Financial Group Limited (ASX: MFG) is a specialist fund management company that offers investment opportunities to high net worth and retail investors in ANZ region, and institution investors globally. In FY21, average funds under management have jumped by 9% and stood at $103.7 billion. Revenue from management and services fees inclined by 7% and stood at $635.4 million. PBT and performance fees of the Funds Management business inclined by 10% and clocked $526.6 million. Statutory NPAT stood at $265.2 million, up by 33% YoY.

For better funding flexibility, MFG has recently established a Dividend Reinvestment Plan (DRP) to enable shareholders to reinvest all or portion of their dividends. Over the past 14 years, MGF has consistently achieved its investment objective of providing a return of over 9% per annum (for retail investors). As of 30 June 2021, MFG’s investment assets stood at $902.9 million, up from $836 million as of 30 June 2020.

Outlook: MFG’s aims to clock a minimum average return of 9% per annum net of sees over the medium to long term period. For FY22, the company expects funds management business expenses to range $125-130 million.

Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)

MFG Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of MFG went down by ~13.539%. The stock made a 52-weeks' low and high of $37.070 and $64.440, 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 improved fund performance in FY21. For valuation purpose, peers like Pendal Group Ltd. (ASX: PDL), Platinum Asset Management Ltd (ASX: PTM), Mainstream Group Holdings Ltd (ASX: MAI), have been considered. Considering the robust fund performance, prudent liquidity position, and upside captured in valuation, we give a 'Buy' rating on the stock at the current market price of $37.300, as of 27 September 2021, at 11:04 AM (GMT+10), Sydney, Eastern Australia.

(2) Genworth Mortgage Insurance Australia Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 878.65 million, Annual Dividend Yield: 2.34%)

Supportive Macro Factors Boosting Volume Growth: Genworth Mortgage Insurance Australia Limited (ASX: GMA) engages in the Loan Mortgage Insurance (LMI) business that offers LMI through flow and portfolio basis, primarily from high loan-to-value ratio residential mortgage in Australia. In FY20, underwriting resulted in a loss of $234 million and statutory NPAT stood at a loss of $108 million, primarily attributed to COVID-19 related reserving in 2020. Despite troublesome bottom-line, GMA experienced strong volume growth with 18.1% YoY incline in new insurance written ($31.6 billion), 29.7% YoY incline in gross written premium ($562 million) and 4.6% incline in net earned premium ($312 million).

In H1FY21, statutory NPAT recovered to enter positive territory and stood at $59.4 million. GMA experienced strong volume growth with 14.7% incline in new insurance written ($15.5 billion), 21.1% incline in gross written premium ($290 million) and 13.3% incline in net earned premium ($171 million). Macro drivers for resilient performance includes improved employment & house price trends and key economic indicators outpaced central estimates. Resilient capital strength is showcased by PCA coverage ratio of 1.74x and surplus capital of $320 million, way above PCA target range.

Outlook: GMA is focused on investing in its operation and process in customer-centric strategic programs to build financial security. GMA has agreed on the advice and submit proposal to the Commonwealth Bank of Australia (CBA) to extend its agreement for the supply of LMI beyond 2022.

Valuation Methodology: Price/Sales Multiple Based Relative Valuation (Illustrative)

GMA Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of GMA went down by ~0.444%. The stock made a 52-weeks' low and high of $1.510 and $3.090, respectively. The stock has been valued using the Price/Sales 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 impact of recent lockdowns and uncertain economic risks. For valuation purpose, peers like Resimac Group Ltd (ASX: RMC), Australian Finance Group Ltd (ASX: AFG), Liberty Financial Group Ltd (ASX: LFG), have been considered. Considering the current trading levels, decent balance sheet position, expected improvements in housing market, strategic borrower support programs, and indicative upside in valuation, we give a 'Speculative Buy' rating on the stock at the current market price of $2.180, as of 27 September 2021, at 10:52 AM (GMT+10), Sydney, Eastern Australia. 

(3) Bendigo and Adelaide Bank Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$ 5.21 billion, Annual Dividend Yield: 5.82%)

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)

BEN Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of BEN went down by ~5.195%. The stock made a 52-weeks' low and high of $5.800 and $11.680, respectively. The stock has been valued using the Price/Book Value multiple based illustrative relative valuation method and arrived at a target price of high single-digit (in percentage terms). The company can trade at a slight discount compared to its peer, considering reduced market share and increased cost to income ratio expectations. For valuation purposes, peers like Bank of Queensland Ltd (ASX: BOQ), Australia and New Zealand Banking Group Ltd (ASX: ANZ), AMP Limited (ASX: AMP) are 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 $9.490, up by ~1.388% as of 27 September 2021. 

(4) Credit Corp Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$ 2.09 billion, Annual Dividend Yield: 2.30%)

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)

CCP Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of CCP went down by ~0.158%. The stock made a 52-weeks' low and high of $16.470 and $34.480, 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 discount compared to its peers, considering a considerable investment outlay. For valuation purposes, peers like WISR Ltd (ASX: WZR), Money3 Corp Ltd (ASX: MNY), Zip Co Ltd (ASX: Z1P) are 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 $31.540, up by ~1.154% as of 27 September 2021. 

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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