Event Core

On 16 December 2021, the Australian Bureau of Statistics released Australian National Accounts pertaining to national, private, and public corporations, government and household capital and financial accounts, and household balance sheets the quarter period September 2021. Key takeaways from the release include –

• 4% surge in household wealth, registered $13,918.5 billion
• $49.6 billion upshift in demand for credit, registered at $126.3 billion
• $2.5 billion declines in Australia’s net lending position, registered at $21.7 billion
• 4% capital investment registered (as a proportion of GDP)

Figure 1: Key Takeaways from Australia National Accounts

Source: Analysis by Kalkine Group

Major Updates on National and Financial Investments During September 2021 Quarter

National Investments: Australia’s national investments slipped by $11.0 billion to $120.4 billion. General government investment decreased by $8.3 billion to $19.8 billion, and non-financial corporations’ investment shrunk by $2.6 billion to $53.0 billion owing to the contraction in gross fixed capital formation.

Financial Investments: Australia stood as the net lender of $21.7 billion for the tenth consecutive quarter. The net lending position was sustained primarily from $61.0 billion acquisition in international (excluding Australia) equities, driven by pension funds, non-money market funds, and other private non-financial corporations (OPNFC), partially offset by $23.4 billion equity investment by the rest of the world (ROW).

Status Update on Credit Market

Housing Credit Demand: Demand for housing credit remained resilient in the September 2021 quarter, primarily driven by consecutively low-interest rates with continued strength manifested by the housing market despite the recent lockdown impact. Owner-occupier variable housing rates fell to 2.63% in October 2021 for new loans and 3.0% for outstanding loans.

General Government’s Borrowing Demand: The government’s funding requirements surged in the September 2021 quarter as Victorian and the NSW state governments braced their economies via lockdown impact. The commonwealth government also reinforced household income via improved social assistance benefits. A $25.3 billion bond issue financed these activities by the national general government and $22.2 billion loan borrowings by state and local governments.

Private Non-financial Corporations: Businesses continued to favour equity raising activities for attracting robust investments from non-residents. Business credit picked up substantially in September 2021 quarter, primarily driven by Authorised Deposit-taking Institutions (ADIs) borrowings as firms seek to leverage a low-interest-rate environment. Financing of other private non-financial corporations was sourced via $31.4 billion equity raising and $6.7 billion borrowings.

Figure 2: Demand for Credit by Sectors

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

Key Risks and Challenges

The gradual unwinding of the HomeBuilder Grant resulted in sequential downticks in home loan financing activities. As interest rates are expected to remain low, investors’ risk appetite is scaling up; some asset prices appear overvalued, and a price fall can fabricate a snowball effect with a potential increase in default rates. Households and businesses, specifically working in highly affected industries, risk experiencing financial distress as COVID-variants prevail. Despite significant cyber defence infrastructure resources, the financial sector is highly exposed to frequent cyber-attacks. Continued financial operations in low-interest-rate conditions may pose a high repricing risk for ADIs.

Figure 3: Key Drivers v/s Key Constraints

Source: Analysis by Kalkine Group

Outlook

Increased Net Investor Loan Commitments: In October 2021, investor loan commitments scaled up by 1.1%, registering near-record levels, posting twelfth consecutive monthly growth. Sequential growth in loan commitments signifies improved lending activities.

Increased Interest Rate Buffer: Considering the bulged risks from high-risk investments, the Australian Prudential Regulation Authority (APRA) raised the interest rate buffer – used for assessing loans – to reduce borrowing capacity for new borrowers.

Income Recoveries: Most borrowers’ income levels have recovered, exceeding pre-pandemic levels. With rapid developments in vaccination rates and gradual reopening of the economy, incomes are expected to resurge from lockdown impacts; hence, encouraging debt repayments.

ADI’s Total Residents Assets Continues to Grow: Total residents assets increased by $35.5 billion or 0.7% in October 2021. Cash and deposits advanced by $16.2 billion or 3.9% over the month, representing a favourable liquidity position.

Rising Credit Card and Business Lending: Credit card lending improved by $0.3 billion or 1.1% in October 2021, likely reflecting economic recovery. Non-financial business lending advanced by $4.6 billion or 0.5%, partly representing improved business sentiments.

Considering an uptick in household wealth and lending position, we have figured out three stocks on ASX that are set to see the momentum.

(1) Insurance Australia Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 10.57 billion, Annual Dividend Yield: 4.66%)

Operational Performance Stands Resilient: Insurance Australia Group Limited (ASX: IAG) operates a general insurance business in Australia and New Zealand with segments – Direct Insurance Australia, Intermediated Insurance Australia, and New Zealand. In FY21, Gross Written Premium (GWP) grew by 3.8%, primarily rate driven. Underlying margins decreased to 14.7% relative to 16.0% in FY20. Reported margins recovered and registered 13.5%, amid net reserve strengthening, perils above allowance, and positive credit spread.

In FY21, underlying margins were vastly affected by reserve release assumption (-1.0%) and other items (-1.2%), partially supported by ~0.9% contribution from COVID-19 benefits. Cash earnings stood at $747 million, and cash ROE stood at 12.0%, excluding unusual items and FY21 dividends. CET1 multiple shrunk to 1.06x relative to 1.23x in FY20. Total gross underwriting expenses soared to $1,930 million from $1,900 million.

Outlook: Over the midterm, IAG aims to clock cash ROE in the range of 12% to 13% with an insurance margin of 15% to 17%. Direct Insurance Australia is expected to bring 750,000 of a million customers that the company aims to attract. FY22 guidance for reported insurance margin stands at 10% – 12% with low single-digit GWP growth.

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

IAG Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last month, the stock of IAG went down by ~6.954%. The stock made a 52-weeks’ low and high of $4.190 and $5.510, 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 decreased loss ratio and improved GWP, the company can trade at some premium compared to its peer’s average Price/Book Value multiple. For valuation, peers like Suncorp Group Ltd (ASX: SUN), AUB Group Ltd (ASX: AUB), NIB Holdings Ltd (ASX: NHF), and others are considered. Given the prudent liquidity levels, a substantial increase in GWP, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the current market price of $4.205, as of 20 December 2021, at 12:59 PM (GMT+10), Sydney, Eastern Australia.

(2) AMP Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 2.96 billion, Annual Dividend Yield: 15.22%)

Improving Residential Owner-Occupied Loans and Improved Investment Opportunity Delivers Growth Prospects: AMP Limited (ASX: AMP) business is divided into three segments, which include AMP Australia (wealth management & bank), AMP Capital, and New Zealand wealth management. In FY20, underlying NPAT stood at $295 million, reflecting COVID-19 impact and increasing operating to service costs. AUM in Australia wealth management shrunk by 8% YoY, and AMP Capital AUM slipped by 7%. AMP maintained a strong capital position with $344 million from AMP Life sale proceeds paid back to shareholders through a special dividend.

In H1FY21, underlying NPAT improved by 57% to $181 million, supported by improved economic and market conditions. The cost-out program delivered considerable cost reductions. Capital and liquidity position stood firm with completion of ~$200 million on-market share buy-back. For the AMP Australia wealth management segment, NAPT stood at $48 million relative to $58 million PcP, reflecting reshaping impacts, legislative and pricing changes.

Outlook: For Australia, Wealth Management expects margins to compress by 7bps in FY21 relative to FY20 due to pricing and simplification initiatives. For AMP Bank, a competitive lending environment may exert pressure on revenue margins in H2FY21, partly offset by reduced deposit and other funding costs. However, loan growth momentum is anticipated to extend in H2FY21. For AMP Capital, FY21 earnings are expected to stand below FY20 results.

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 AMP went down by ~19.163%. The stock made a 52-weeks’ low and high of $0.885 - 1.695, 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 some discount compared to its peers, considering potential contraction in margins, competitive lending environment, and low AMP Capital earnings expectations. For valuation purposes, peers like Challenger Ltd (ASX: CGF), Humm Group Ltd (ASX: HUM), Prospa Group Ltd (ASX: PGL), and others are considered. Given the improved operational performance and customer reach, favourable investment opportunities, favourable upshifts in NPAT, current trading levels, and upside indicated by valuation, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.905, as of 20 December 2021, at 01:02 PM (GMT+10), Sydney, Eastern Australia. 

(3) ­­­Australia and New Zealand Banking Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$ 77.89 billion, Annual Dividend Yield: 5.13%)

Improving Capital Strength with Falling Risk Intensity: Australia and New Zealand Banking Group Limited (ASX: ANZ) is engaged in providing an array of banking and financial products and services. The company’s Australia and New Zealand segments are commercial and retail banking. For FY21, statutory profit improved by 72% YoY to $6.16 billion. Net interest margin (NIM) improved to 1.65%, primarily driven by a $38 billion shift from variable to a fixed rate, increased system liquidity, and competitive pricing.

During FY21, capital strength stood resilient and growing with an APRA Level 2 CET1 ratio of 12.3% relative to 11.4% in FY19. As measured by credit risk-weighted assets (CRWA) as a proportion of exposure at default (EAD), risk intensity reduced to 33.4% relative to 36.6% in FY19. Net tangible assets stood at $21.09/share, up from $19.59/share registered in FY19. Collective provision coverage ratio slipped by 17 bps to 1.22%.

Outlook: ANZ is building growth-oriented retail and small business prospects to deliver compelling digital offerings for financial wellbeing. With continuous integration with digital platforms, ANZ witnessed an uptick in payments volume.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)

ANZ Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: Over the last three months, the stock of ANZ delivered gains of ~0.295%. The stock made a 52-weeks’ low and high of $22.560 and $29.640, 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 improved cash profits and net interest margin. For valuation purpose, peers like Bank of Queensland Ltd (ASX: BOQ), Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) have been considered. Given the resilient liquidity position, reduced risk intensity, and upside indicated by valuation, we give a ‘Hold’ rating on the stock at the closing market price of $27.250, down by ~1.376% as of 20 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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