The Wrap: Credit, Retail, Health & Automotive

Weekly Reports | Jun 22 2018

Weekly Broker Wrap: credit crunch; retail margins; health insurers; NZ broadband; and automotive.

-Mortgage growth resilient despite credit tightening
-Disruption by subscription services likely to impact retail margins
-Health insurers generally running strong levels of capital
-Stabilising margins observed in NZ broadband
-New vehicle sales remain soft, luxury outperforms in May


By Eva Brocklehurst

Credit Crunch

What credit crunch? That is Citi's question. Despite investor fears, the broker points out mortgage credit is growing at around 6% annually after slowing modestly since August 2017. Growth is tracking at around twice the rate compared to the last time residential property prices were in decline, in 2012.

The source of resilience has been owner-occupier growth, which has stayed at around 8% for the past 18 months. As property prices soften two cohorts of borrowers emerge - first home buyers and upgraders. Citi expects upgrading to larger homes will feature over the next 2-3 years, particularly if house prices remain weak.

First home buyer applications as a proportion of borrowers have increased to 13% from 8% over the last three years, as their main competitors in the market, investors, feel the effects of regulatory intervention.

Going forward Citi believes mortgage credit will be more robust than many expect. Nevertheless, the broker expects the listed banks to continue to suffer market share declines, as well as net interest margin contraction from price discounting. The failure of a credit crunch to materialise will also support bank capital and dividends.

Retail Margins

Margins remain the issue for retailers, Credit Suisse contends. Launch of subscription services by eBay and Amazon Prime can be expected to accelerate the development of free and subsidised shipping. Kogan has launched free delivery as well. There has been no obvious response from the major retailers as yet.

While it may be tempting to expect the market share to shift following these announcements, Credit Suisse believes the near-term impact is likely to be on margins. Incumbent retailers appear to have little alternative but to respond.

On typical 7% online sales penetration from either JB Hi-Fi, ((JBH)) Harvey Norman ((HVN)), Myer ((MYR)) or Super Retail ((SUL)), the broker calculates delivery revenue would be around 20 basis points with respect to sales, an equivalent negative impact of fully subsidised delivery. This equation excludes the potential for free returns, for which these retailers currently utilise stores.

The broker also suggests the extension of the GST to all imports of goods and services irrespective of value is unlikely to be a material factor weighing on local retailers.

The main impact from this is likely to be the unwillingness of sellers to undertake the collection task and their consequent exit from the market. EBay has introduced systems to collect GST from offshore sellers while Kogan is able to mitigate GST with logistics efficiencies.

Therefore large-scale changes to the market structure are considered unlikely. At most, Credit Suisse expects a marginal narrowing of price differentials.

Health Insurers

Final guidance on new capital standards for the private health industry is likely to be released in the second half of 2018. APRA has assumed the role of a regulator from the Private Health Insurance Administrative Council.

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