I. Sector Landscape
Globally, the financial services segment has remained resilient from the ongoing constraints of the Russia-Ukraine geopolitical unrest. Aided by expansionary fiscal and monetary policies, output has rebounded in most economies, especially those with the most progressive vaccination rollout programs. Households have continued to build financial buffers, indicated by the high saving rate. Businesses have maintained sound lending standards despite an uptick in the debt-to-income ratio.
Figure 1: Recent RBA Monetary Policy Decision
Source: Based on Reserve Bank of Australia Data, Analysis by Kalkine Group
Improved Lending Indicators
Key Statistics on Housing: In January 2022, the new loan commitments rose by +2.6% for housing, +0.8% for personal fixed-term loans, and +41.6% for business construction. The value of new loan commitments for investors clocked a record high of $33.7 billion. Loan commitments for investor housing advanced by 6.1% and registered a record of $11.0 billion.
Figure 2: Uproar in Total Housing Loan Commitments:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Update on Personal and Business Finance: In January 2022, the value of new loan commitments for fixed-term personal finance advanced by 0.8%, for road vehicles surged by 0.9%, and for household and personal goods purchase edged up by 19.3%. In January 2022, businesses are expediating capital expenditure plans, warranted by a 41.6% rise in new loan commitments for total construction finance, after an uptick of 66.6% in the previous month.
Improved Statistics on Insurance and Superannuation
Private Health Insurance Statistics: In the calendar year (CY) 2021, the private health insurance industry reported a profit of $1.8 billion, up by 229.3% YoY. Premium revenue surged 5.8% via a combination of premium rate increase and membership growth. Hospital treatment membership advanced by 228,506 persons on December 31, 2021. The profitability surge was driven by the recovery in the insurance business and investment income following the crunched margins and investment returns on account of the pandemic.
Superannuation Statistics: Total contributions stood at $139.1 billion in CY2021, up by 15.5% YoY. Over the period, the employer contribution advanced by 5.7%, totalling $102.7 billion. The contributions made over the year surpassed long-term trends. The significant increase resulted from reactions to COVID-19 related measures, such as increased lockdown savings and financial solid advisory engagement.
Figure 3: Key Performance Metrics for Insurance and Superannuation
Source: Based on Australian Prudential Regulation Authority Data, Analysis by Kalkine Group
Index Performance:
The ASX 200 Diversified Financials (Industry Group) posted 10-year returns of ~+187.41% compared to ~+69.79% by the ASX 200 Index. Increasing consumer spending, surged housing demand, decent investment avenues, improved net flows, and favourable economic parameters advised by the RBA have contributed to the sector growth.
Figure 4: The ASX 200 Diversified Financials (Industry Group) outperformed the ASX 200 Index in the past ten years by astonishing ~117.62%:
Source: REFINITIV as of March 03 2022
Key Risks and Challenges
Total unconsolidated assets of life insurance corporations crunched by 2.1% QoQ and stood at $126.3 billion. Housing credit has spiked alongside solid growth in house prices; this may raise the risk of households becoming excessively leveraged, potentially affecting the quality of housing loans and the financial position of ADIs. Due to rising bond yields, investment income for general insurance companies slipped from $1.7 billion in December 2020 to $0.4 billion in December 2021. The recent disruption from the geopolitical stress between Russia and Ukraine may affect global investment links of superannuation funds. Cyber-attack susceptibility has amplified due to the technological revolution in the banking and financial services sector.
Outlook
Improved Capital Expenditure Activities: The total new private capital expenditure is estimated to clock $140.8 billion in FY22, revised upward by 1.6% from the previous estimate. The surged private new capital expenditure signals growth prospect for business financing activities.
Substantial Growth in Managed Funds Industry: In December 2021 quarter, the total managed funds industry advanced by $86.1 billion or +2.0% and registered $4,476.6 billion funds under management. Consolidated assets rose by 2.5% and clocked $3,604.6 billion.
Improved Profitability of Authorised Deposit-Taking Institutions (ADIs): For the year ended September 2021, ADI’s NPAT increased by a substantial 73.2% PcP to $36.4 billion, primarily driven by a $14.7 billion reduction in charges for bad or doubtful debts.
High PCA Coverage Ratio and Asset Return: For general health insurance companies, the PCA coverage ratio surged to 1.72x as of December 31 2021, from 1.70x reported on December 31 2020. Return on net assets increased to 5.6% in CY 2021 relative to 0.2% in CY 2020.
Normalising Benefit Payments: For superannuation funds, the benefit payments stood at $82.3 billion in CY 2021, declining by 27.2% YoY, reflecting the return of benefit payments to historically average levels following the closure of the Early Release Scheme (ERS).
II. Investment theme and stocks under discussion (NHF, PNI, IFL)
After understanding the sector, let us now look at three 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: NHF (NBI Holdings Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$2.97 billion)
NHF is a private health insurer in Australia and New Zealand. Through its Travel business segment, the company offers the sale and distribution of travel insurance policies across the world.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 16.30% on March 03, 2022. However, we believe that the stock might trade a slight discount compared to its peers’ median Price/Book Value (NTM trading multiple) given current geopolitical stress affecting the overseas investments. For valuation, peers such as Generation Development Group Ltd (ASX: GDG), Medibank Private Ltd (ASX: MPL), PSC Insurance Group Ltd (ASX: PSI) have been considered. Considering the policyholder growth, improved premium, controlled expenses, current trading levels, and upside indicated by valuation, we give a "Buy" recommendation on the stock at the closing market price of $6.360, down by ~1.852% on March 03, 2022. In addition, the stock has delivered an annualised dividend yield of 3.85%.
NHF Daily Technical Chart, Data Source: REFINITIV
2. ASX: PNI (Pinnacle Investment Management Group Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$2.04 billion)
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.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 16.23% on March 03, 2022. Moreover, we believe that the stock might trade at some premium compared to its peers’ average Price/Book Value (NTM trading multiple) given increased FUM and decent fundamentals. For valuation, peers such as EQT Holdings Ltd (ASX: EQT), Perpetual Ltd (ASX: PPT), Insignia Financial Ltd (ASX: IFL), and others have been considered. Considering the diversified asset base, resilient fundamentals, decent bottom-line growth, current trading levels, and upside indicated by valuation, we give a "Buy" recommendation on the stock at the closing market price of $10.100, down by ~1.464% on March 03, 2022. In addition, the stock has delivered an annualised dividend yield of 3.36%.
PNI Daily Technical Chart, Data Source: REFINITIV
3. ASX: IFL (Insignia Financial Limited)
(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$2.41 billion)
IFL is engaged in financial services business that includes financial planning advisory, stockbroking services, investment research, training, compliance support, and access to financial products.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 12.19% on March 03, 2022. Moreover, we believe that the stock might trade at a slight premium compared to its peers’ median Price/Book Value (NTM trading multiple), improving industry fundamentals and positive industry net flows. For valuation, peers such as EQT Holdings Ltd (ASX: EQT), Perpetual Ltd (ASX: PPT), Pacific Current Group Ltd (ASX: PAC), and others have been considered. Considering the surged FUMA, intact profitability, current trading levels, and upside indicated by valuation, we give a "Hold" recommendation on the stock at the closing market price of $3.720 as of March 03, 2022. In addition, the stock has delivered an annualised dividend yield of 6.26%.
IFL Daily Technical Chart, Data Source: REFINITIV
Note: All the recommendations and the calculations are based on the closing price of March 03, 2022. The financial information has been retrieved from the respective company’s website and REFINITIV.
Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as the valuation has been achieved and is subject to the factors discussed above.
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