Event Core
On 15 March 2022, the Australian Prudential Regulation Authority (APRA) released Authorised Deposit-taking Institution (ADI) Performance data and ADI Property Exposures for the quarter ending December 2021. Measures of ADI industry showcased resilience despite the emergencies of Omicron variant in the latter half of December 2021 quarter.
Key Takeaways from APRA release
ADI Demonstrating Resilience: Industry net profit surged by ~$15.6 billion over the past year and returned to pre-COVID levels, partly driven by the release of provisions raised amid earlier pandemic stages. ADI’s capital and liquidity positions stood strong, affirmed by decreasing non-performing loans. Charges for bad or doubtful debts dipped by $13.5 billion over the year.
Figure 1: Key Statistics on ADIs
Source: Based on Australian Prudential Regulation Authority Data, Analysis by Kalkine Group
Strength in Residential Mortgage Lending: Residential mortgage lending elevated with the new loans funded, and stock of outstanding loans increased over the December 2021 quarter. New lending to investors outperformed new lending to owner-occupiers for the quarter. The proportion of new loans with high debt-to-income ratios increased to 24.4%, relative to 23.8% in the previous quarter.
Figure 2: Metrices of Residential Mortgage Credit Outstanding
Source: Based on Australian Prudential Regulation Authority Data, Analysis by Kalkine Group
Key Lending Indicators
Investor Lending Touched Record High: New investor housing loan commitments surged 6.1% to another record of ~$11.0 billion in January 2022. The value of new loan commitments for investor housing has illustrated 15 consecutive months of growth, consistent with the increase in house prices and strong housing market.
Figure 3: Seasonally Adjusted New Borrower-accepted Loan Commitments for January 2022
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Performance of Superannuation and General Insurance Industry
Superannuation Funds Performance: Total unconsolidated assets of superannuation funds advanced by 2.7% to $3,524.1 billion in the December 2021 quarter. Contributions increased by 15.5% to $139.1 billion for the year ending December 2021. Over the period, employer contributions advanced by 5.7%, totalling $102.7 billion.
General Insurance Performance: The industry reported a net profit after tax of $1.7 billion with a return on assets of 5.6% during the year ended 31 December 2021, driven by solid underwriting results, which advanced from -$0.08 billion in December 2020 to +$4.0 billion in December 2021 year-end.
Figure 4: Managed Funds Industry Illustrating an Uptrend ($ in Bn):
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Key Risks and Challenges
Housing credit has spiked with robust growth in house prices, which may proliferate the risk of households becoming excessively leveraged, potentially affecting the quality of loans and the financial position of ADIs. Investment income for general insurance companies slipped from $1.7 billion in December 2020 to $0.4 billion in December 2021 due to increased bond yields. The recent disruption from the geopolitical stress between Russia and Ukraine may affect the international assets of superannuation funds. Total unconsolidated assets of life insurance corporations crunched by 2.1% QoQ and stood at $126.3 billion. Cyber-attack susceptibility has amplified due to the technological revolution in the banking and financial services sector.
Figure 5: Key Drivers v/s Key Constraints
Source: Analysis by Kalkine Group
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.
Surged ADI’s Net Profit: The ADI’s NPAT advanced by 71.4% or $15.6 billion for the year ended December 2021. The surge was primarily driven by a significant reduction in bad or doubtful debts charges.
Loan Growth in ADIs: In December 2021 quarter, gross loans and advances increased by 2.2% to $3.7 trillion, reflecting the strong business credit growth and robust housing market.
Improved Inflow in Managed Funds Industry: The total managed funds industry advanced by ~$86.1 billion or 2.0% sequentially and stood at $4,476.6 billion funds under management for December 2021 quarter.
Improved PCA Coverage Ratio: For general health insurance companies, the PCA coverage ratio surged to 1.72x as of 31 December 2021 from 1.70x reported on 31 December 2020, signaling decent liquidity.
Considering the positive developments in ADIs and financial services industry, we have figured out three stocks on ASX that are set to see the momentum.
(1) Netwealth Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 3.54 billion, Annual Dividend Yield: 1.37%)
Fundamentals Backed by RBA Actions and Decent Fund Level: Netwealth Group Limited (ASX: NWL) provides financial services to its clients comprising managed funds, portfolio services, superannuation master fund, to name a few. In FY21, the average account size expanded to $481k as of 30 June 2021 as revenue streams are diversified, and ancillary revenues have surged. Platform revenue per account surged to $1,604 to $1,607 in FY21.
In H1FY22, funds under administration (FUA) stood at $56.7 billion as of 31 December 2021, up by $17.9 billion (+46.0%) from 31 December 2020. FUA net inflows stood at $7.6 billion, substantially up by $3.2 billion. Platform revenue over average FUA for H1FY22 stood at 31.7bps, down by 8.8bps PcP, due to the new pricing policy administered from 1 January 2021 combined with a surge in average account size.
Outlook: Growth has continued to accelerate in H1FY22, and the company expects to benefit from ongoing industry changes and consolidations. When RBA rates return to 50bps by March 2022, NWL would expect margins to surpass 105 bps.
Valuation Methodology: Price/Earnings Value Multiple Based Relative Valuation (Illustrative)
NWL Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of NWL went up by ~6.567%. The stock made a 52-weeks low and high of $12.200 and $18.250, respectively. The stock has been valued using the Price/Earnings multiple based illustrative relative valuation method and arrived at a target price of single high-digit (in percentage terms). Considering decent fundamentals and improved industry prospects, the company can trade at a slight premium compared to its peers. For valuation purposes, peers like Hub24 Ltd (ASX: HUB), ASX Ltd (ASX: ASX), WISR Ltd (ASX: WZR), and others have been considered. Considering the improved FUA, expanding platform revenue, current trading levels, and upside indicated by valuation, we give a 'Buy' rating on the stock at the closing market price of $14.280, down by ~1.721% of 21 March 2022. Markets are currently trading in a highly volatile zone due to specific macro-economic issues and prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.
(2) Latitude Group Holdings Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.86 billion, Annual Dividend Yield: 8.78%)
Symple Synergies Exploring Strategic Growth: Latitude Group Holdings Limited (ASX: LFS) is involved in instalments and lending business covering Australia and New Zealand. In addition, the company offers personal loans, credit cards, vehicle loans through designated channels. In FY21, statutory profits stood at $160 million, and cash NPAT clocked $232 million. Total volume stood at $7.3 billion, up by 4.3%. Lending and NZ instalments expanded by 41.6% and 10.1%, respectively.
The company completed Symple acquisition, alongside front book origination to go live in Q2FY21. New segments in Big Ticket & international launched the first transaction in Q4FY21. The company has recently announced the Humm acquisition. Tangible equity ratio advanced to 8.7% in FY21 relative to 6.5% in FY20 (Pro-forma), up by 217 bps. Proforma Cash EPS increased by 3% and stood at 23.1 cents/share.
Outlook: Key drivers for FY23 and forward includes economic normalisation, synergies with Symple acquisition, Humm acquisition, international expansion, and partnership. Synergies with Symple acquisition is expected to promote annualised FY23 estimates for operating income to circa $13 million.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
LFS Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of LFS went down by ~8.586%. The stock made a 52-weeks low and high of $1.710 and $2.990, 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). Considering interest rate volatility and geopolitical risks, the company can trade at a slight discount compared to its peers. For valuation purposes, peers like Credit Corp Group Ltd (ASX: CCP), Zip Co Ltd (ASX: ZIP), Eclipx Group Ltd (ASX: ECX), and others have been considered. Considering the improvement in fundamentals, decent financial position, synergy build-up, 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 $1.810, as of 21 March 2022, up ~0.56%. Markets are currently trading in a highly volatile zone due to specific macro-economic issues and prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.
(3) Bank of Queensland Limited (Recommendation: Hold, Potential Upside: Single High-Digit)
(M-cap: A$ 5.40 billion, Annual Dividend Yield: 4.63%)
Improved Liquidity Position Ensuring Low-Risk Operations: Bank of Queensland Limited (ASX: BOQ) is an Australia-based regional bank. The company’s operating segments encompass Retail Banking and BOQ Business. In FY21, statutory profit and cash earning stood strong, reflecting balance sheet growth, margin management, and improved economic conditions. Statutory profit stood at $369 million, up by 221% YoY, and cash earnings after tax advanced by 83%, inclusive of 2 months of ME Bank.
Business momentum continued to build with quality housing growth looming at 1.7x system, alongside good margins and cost management strategies. Capital strength to support business transformation and growth with CET1 of 9.80%. Asset quality remained sound, with collective provision levels marginally reduced with the improved economic scenario. The final dividend stood at 22 cents/share, bringing the FY21 final dividend to 39 cents/share.
Outlook: For FY22, capital investment spending ranges between circa $115 – 120 million, including ME Bank, involving integration costs of $70 – 80 million. CET1 is expected to sustain comfortably at 9.5%, and the dividend payout ratio target range stands at 60-75% of cash earnings.
Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)
BOQ Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of BOQ went down by ~1.067%. The stock made a 52-weeks low and high of $7.490 and $9.840, 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 liquidity position and proliferating lending indicators. For valuation purposes, peers like Australia and New Zealand Banking Group Ltd (ASX: ANZ), Bendigo and Adelaide Bank Ltd (ASX: BEN), Judo Capital Holdings Ltd (ASX: JDO), and others have been considered. Considering the decent fundamental levels, improved liquidity position, growth prospects in shareholders’ returns, current trading levels, and upside indicated by valuation, we give a 'Hold' rating on the stock at the closing market price of $8.330, down by ~0.952%, as of 21 March 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.
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.
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