Event Core

On 2 December 2021, the Australian Bureau of Statistics (ABS) has released lending indicators for October 2021, focusing on borrower-accepted finance commitments for personal, housing, and business loans. New loan commitments for housing slipped 2.5% during the period while commitments for personal fixed-term loans and business construction surged by 4.7% and 3.6%, respectively.

Figure 1: Trends in Loan Commitments:

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

Credit Growth Statistics from RBA

Latest update from RBA: As per the Monetary Policy Meeting held on 3 December 2021, the Reserve Bank of Australia (RBA) board concluded to maintain a cash rate target at 10bps and 0% interest rate on Exchange Settlement balances. RBA will continue its government securities purchase program at a rate of $4 billion/week until February 2022 (tentative). Moreover, RBA will discontinue the target of 10bps for the April 2024 Australian Government bond.

Credit Growth Drivers: Total credit growth picked up on six-month-ended terms amidst resilient housing and business components growth. Commitments for housing loans witnessed a modest decline but sustained at elevated levels, with curtailed commitments for owner-occupiers slightly offset by a surge in commitments for investors.

Figure 2: Growth in Selected Financial Aggregators

Source: Based on Reserve Bank of Australia Data, Analysis by Kalkine Group

Update on Flow of Funds

Flow of Funds

Figure 3: Takeaways from Flow of Funds Statistics

Source: Analysis by Kalkine Group

Movements in Lending Activities

Credit Demand from Households: The value of new loan commitments for total housing slipped by 2.5% (+32.2% PcP) but remained at an elevated level of $29.57 billion. Owner-occupied housing dipped 4.1% (+15.1% PcP), and investor housing surged 1.1% (+89.6% PcP), continuing an uptrend since October 2020.

Statistics on Personal and Business Finance: In October 2021, the value of new loan commitments for fixed-term personal finance surged by 4.7% and for personal investment commitments spiked by 11.6%. During the same period, the value of new loan commitments in construction finance expanded by 3.6%, primarily driven by a 54.4% uptick in finance for construction dwellings.

Figure 4: Snapshot of Key Lending Activities

Source: Analysis by Kalkine Group

Key Risks and Challenges

Figure 5: Key Drivers v/s Key Constraints

Source: Analysis by Kalkine Group

The unwinding of the HomeBuilder Grant resulted in sequential declines in home loan financing activities. As mentioned by the RBA in Financial Stability Review for April 2021, bad debts are forecasted to rise over the 2021 period as repayment deferrals move into arrears for a small share of loans and as fiscal support is reduced. Moreover, cyber-attacks and related incidents are likely to give rise to systematic implications in particular circumstances. Financial operations in a low-interest-rate environment may pose a repricing risk to the Authorised Deposit-taking Institution (ADI) industry. Additionally, business loans may be affected by the government’s gradual retrenchment of relief policies in pandemic times.

Outlook

Residents Loans and Finance Leases peaking: Investment housing lending surged by $1.5 billion or 0.2% in October 2021 quarter. The sustained growth levels in housing lending continued to manifest strong borrower demand, primarily by low mortgage interest rates.

Credit Card Lending Surged: In October 2021, credit card lending expanded by $0.3 billion or 1.1% in October 2021, which was embarking on its first monthly increase since April 2021. The recovery in economic conditions probably reflects this. However, other household lending slipped by 0.4% or $0.3 billion.

Substantial Improvement in Non-Financial Business Lending: The non-financial business lending activity increased substantially by $4.6 billion or 0.5% in October 2021, partly driven by business sentiments and conditions improvements. Loans to financial institutions edged up by $0.2 billion or 0.2%, and loans to general government advanced $0.3 billion or 1.2%.

Improved Funding Conditions Translate into Favourable MBS Issuance: 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.

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, according to the Financial Stability report by the RBA.

Considering the developments in ADIs and financial services, we have figured out four stocks on ASX that are set to see the momentum.

(1) Platinum Asset Management Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 1.60 billion, Annual Dividend Yield: 8.79%)

Significant Developments in Operating Performance: Platinum Asset Management Limited (ASX: PTM) is engaged in asset management, financial planning, and financial advisory services. For FY21, total revenue and other income inclined by 5.9% amid a 10% increase in Funds Under Management, clocking $23.5billion, primarily driven by the investment performance of $5.5 billion. PTM earned performance fee revenue of $4.0 million relative to $9.1 million in FY20. Absolute investment performance towards to value of PTM’s seed investments touched $43.9 million relative to $8.7 million in FY21.

In FY21, PBT inclined by 6.1% and touched $234.2 million. However, the significant gains of PTM’s seed investments were partially offset by a decline in performance and management income. As a result, PTM launched the fixed cash distribution option to enable investors to elect on either receiving fixed annual cash distribution yield (at 4%).

Outlook: The ongoing process of vaccination drill is expected to place the economy in expansion territory and hence better investment opportunities. The outlook for equity markets remains bullish, implying high investment funds.

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

PMT Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of PTM went down by ~12.50%. The stock made a 52-weeks’ low and high of $2.600 and $5.140, 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 the high fund diversification attribute, the company can trade at a slight premium compared to its peer’s average Price/Book Value multiple. For valuation, peers like EQT Holdings Ltd (ASX: EQT), ASX Ltd (ASX: ASX), Magellan Financial Group Ltd (ASX: MFG) have been considered. Given the prudent liquidity levels, resilience showcased by funds’ performance, and valuation, we give a ‘Buy’ rating on the stock at the closing market price of $2.660, down by ~2.565%, as of 06 December 2021. 

(2) ­­­Resimac Group Ltd (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 647.93 million, Annual Dividend Yield: 4.03%)

Resilient Investment Vehicles and Multi-Channel Reach Exhibits Growth Prospects: Resimac Group Ltd (ASX: RMC) operates a residential mortgage lender and multi-channel distribution business, which specialises in prime and speciality lending. In FY21, RMC reported $107.6 million in statutory NPAT, up by 92% YoY, and net interest income of $242.7 million, up by 29% YoY. Normalised NPAT increased by 87%, primarily driven by high asset under management and increased net interest income. Cost-to-Income ratio declined by 580 bps due to top-line growth, partly offset by investments in core banking transformation.

Home loan settlements increased by 3% YoY, driven by New Zealand (up by 81% YoY) and homeloans.com.au (up by 15% YoY). Home loan assets under management increased by 11% YoY, and direct to consumer channel, via homeloans.com.au, increased its spread by 10% and reached $1.9 billion. RMC’s NIM increased by 17 bps, significantly attributed to BBSW and partly offset by home loan pricing and funding costs. In FY21, RMC issued $5.8 billion of Australian and NZ Prime and Speciality RMBS at lower funding costs.

Outlook: Resimac home loans and homeloans.com.au target over $8 billion in annual settlements by FY24 via building a low-cost orientation model, high conversion and customer retention, brand recognition, and offering flexible lending solutions. Resimac asset finance targets over $1 billion in annual settlements by FY24 with a comprehensive product suite, repeat ABS issues, and lending commercial and consumer asset financiers.

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

RMC Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of RMC went down by ~18.42%. The stock made a 52-weeks' low and high of $1.525 and $2.800, 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 NIM, multi-channel operations, and increased assets under management. For valuation purposes, peers like Genworth Mortgage Insurance Australia Ltd (ASX: GMA), Australian Finance Group Ltd (ASX: AFG), Liberty Financial Group Ltd (ASX: LFG) are considered. Considering the improved operational performance, improved customer reach, broader operations into home loans and asset finance, and valuation, we give a 'Speculative Buy' rating on the stock at the current market price of $1.525, as of 06 December 2021, at 12:54 PM (GMT+10), Sydney, Eastern Australia.

(3) ­­­CCP (Recommendation: Hold, Potential Upside: High Single-Digit)

(M-cap: A$ 2.14 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 ~4.174%. The stock made a 52-weeks' low and high of $23.720 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 closing market price of $31.220, down by ~1.297% as of 06 December 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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