The Wrap: Health, Banks & Salary Packaging

Weekly Reports | Jan 19 2018

Weekly Broker Wrap: Private health insurance; housing; banking; online; and salary packaging

-Pressure on private health insurer margins likely to grow
-High levels of new dwelling completions expected to weigh on prices
-Lack of leverage to growth but banks still benefiting from favourable margin trends
-Rise of online takeaway food aggregators pressure urban shopping centres
-Valuation discount still required to capture the risk for salary packaging operators


By Eva Brocklehurst

Private Health Insurance

Ord Minnett suggests the tougher approach from the government on insurer price rises may lead to margin pressures in FY19 and nib Holdings ((NHF)) may suffer less than Medibank Private ((MPL)). Approaching an election year, the broker expects there will be pressure to achieve increases below 4%.

Both companies experienced margin expansion in FY17, with inflation running behind premiums. This gap is likely to disappear, or even reverse in FY18, as below-industry increases from April 2017 for both listed companies are reflected in FY18 results, while both insurers have some cost reduction programs that could partially offset this.

Macquarie's analysis suggests claims growth is tracking below historical levels. The broker expects a weighted average premium increase of 3.85% for Medibank Private and 3.80% for nib versus a sector increase of around 4%.

The broker expects the industry to receive ongoing support from government policy to ensure that sufficient young people retain private health insurance and support sustainability. The expectation for continued below-trend claims growth supports the broker's estimates for a Medibank Private margin for FY18 of 8% and nib of 6.1%.

Premium rate increases signal as much about claims volatility as the direction of profits, in the broker's opinion, and a narrowing of premium rate variation supports the view that claims volatility is reducing for the sector.

Housing

Recent data signal that house prices in Sydney as well as at the national level have already stopped falling. Macquarie suggests it very likely that prices at the national level are now again rising modestly.

As always, there are large differences between locations and the type of housing. The broker does not expect a repeat of the bounce that occurred in 2016, as that year witnessed 50 basis points of reductions to the official cash rate, while this year there is likely to be speculation regarding the timing of eventual rate rises.

Banks have also become more discriminatory in terms of their lending. The broker believes rising interest rates will eventually be a major stumbling block for housing prices and periods of broad-based falls in dwelling prices are much more likely in the medium term.

UBS observes the size of the retracement in housing activity and price growth, particularly dwelling commencements, is less than previously expected. This suggests that the full impact of macro prudential tightening is having more of a negative impact on lending and prices for established housing than for new housing. The broker agrees the historical trigger for a sharp reduction in housing activity are increases in official rates.

As UBS expects the Reserve Bank to maintain steady rates until 2019. Amid the expected rebound in approvals, forecasts for dwelling commencements are upgraded to 200,000 in 2018 and 185,000 in 2019. Nevertheless, with activity concentrated in high-rise developments, GDP-basis dwelling investment is still expected to fall. The broker calculates that, even under its base case, the high ongoing level of completions/supply in coming years should weigh on prices.


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