The Wrap: Aussie Banks & Credit, Gold, AREITs

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Weekly Broker Wrap: Aussie Banks & Credit; Gold's safe haven status; AREITs and earnings momentum; which small cap retailers?; independent financial platforms; and Australian Whisky Holdings.

-The public debate about yes/no credit crunch and the banks continues
-Gold's safe have status temporarily hampered
-A pre-reporting season look into small cap retailers
-Citi discovers earnings momentum for AREITs
-Credit Suisse thinks the shift towards independent financial platforms has much further to go
-A new strategic alliance binds whisky with wine, Tasmania with the Barossa

By Rudi Filapek-Vandyck, Editor FNArena

Banks And Credit

Credit crunch? What credit crunch? Macquarie analysts have been on the more positive side when it comes to the outlook for housing and credit availability in Australia; one key reason as to why the team of banking analysts continues to see good value among Australian banks.

Amidst ongoing talk about sharper declines in housing prices and tighter lending standards by the banks in anticipation of Royal Commission fall-out, Macquarie analysts conducted their very own "mystery shopping" survey, visiting nine lenders in Australia. Their findings support the view held up prior: probabilities of a genuine credit crunch in Australia seem severely exaggerated.

Here's the full appraisal from the Macquarie report on the survey: "Despite a prevailing perception that banks are rationing credit and tighter lending standards are having an impact on property prices, we found that credit availability hasn’t materially changed over the last twelve months. Our analysis highlighted that maximum lending amounts contracted by ~5% across the surveyed lenders and funding remains available (mainly from unregulated players). As a result, we believe credit crunch concerns which have impacted bank valuations are overstated, and the current relative discount to the Industrials of ~34% is excessive."

In addition, Macquarie also found lenders are currently competing aggressively for new business, despite rising funding costs. Such a context, highlight the analysts, is generally not consistent with signs of credit rationing.

The team of banking analysts led by Jonathan Mott at UBS, however, remains one of the key proponents behind the risk of a genuine credit crunch squeezing banks and the Australian economy in the months to come, and they too released simultaneously an update on their thoughts and findings.

Apparently the two most received questions from UBS clientele are "how much has credit tightened?" and "is there more to come?"

UBS argues Australian banks have progressively tightened underwriting standards since 2015. The team estimates we are one-third through this process of tightening credit for owner occupiers while specifically for property investors the process has already largely run its course. UBS does make the remark that for investors with multiple investment properties, limits on very high debt-to-income (DTI) may become the binding constraint, not just serviceability.

Contrary to Macquarie, UBS believes the risk of a genuine credit crunch is rising. The analysts' reduced forecasts estimate housing credit growth of circa 4% in FY18, but zero growth in FY19/FY20. With funding costs rising, the analysts see pressure building for Net Interest Margins (NIMs) across the sector.

UBS's view is as follows: "We believe the banks will be eager to pass this onto customers via mortgage repricing. However, the political sensitivities may limit this in our view".

To be continued.

Gold: The Bull Never Says Die

Investors looking for safe havens might have been surprised by gold's remarkably feeble performance in recent weeks. Global financial markets moved into risk off mode and what does gold do? It sinks through the psychological level of US$1250/oz. Huh?

Analysts at UBS point firmly into the direction of the stronger US dollar. They also draw experience from the past and conclude: historically, such breakdowns in gold's safe haven status don't last. UBS retains a positive outlook for the next twelve months, with the caveat that a stronger USD might continue to keep a tab on gold's performance in the short term.

UBS has been surprised by the firm rally in the greenback and suspects gold might remain caught inside a sideways moving channel for the next three months or so. Its projection twelve months out is for gold to be priced at US$1375/oz.

Small Cap Retailers & Reporting Season

Citi analysts are already looking forward to the upcoming reporting season, having tried to assess which small cap retailer might be able to please investors with their financial report. Citi thinks Accent Group ((AX1)), Nick Scali ((NCK)), Premier Investments ((PMV)) and Super Retail ((SUL)) seem best placed for an upside surprise vis a vis consensus expectations.

At risk of delivering a nasty disappointment, according to Citi, are Myer ((MYR)), Greencross ((GXL)), Michael Hill International ((MHJ)) and Baby Bunting ((BBN)).

Here is where things get a little more complicated. Citi's number one pick for this segment is "the most profitable retailer" under its coverage, cheap bling & jewellery marketer Lovisa ((LOV)), followed by Baby Bunting, which we now know is seen as likely to disappoint in August. The analysts explain their number two favourite might be in for another beating, but on a twelve month horizon the company should benefit from a much improved trading environment. Most competitors are going out of business, remember?

Accent Group and Super Retail are ranked as third and fourth favourites, while Michael Hill, Greencross and Myer are least preferred. The latter has the added risk of a stretched balance sheet.

A-REITs Respond To Earnings Momentum

The secret with picking the right A-REITs is you have to watch earnings momentum, suggest analysts at Citi. On their sector observation, those with positive earnings revisions to date have outperformed their peers, sometimes in significant fashion, while those that have experienced negative momentum in earnings estimates have mostly done the opposite.

Think Goodman Group ((GMG)), Lend Lease ((LLC)) and Charter Hall ((CHC)) for the "good guys" and Vicinity Centres ((VCX)) as the typical underperformer.

To pick the next group of sector outperformers, watch FY19 forecasts, advises Citi. The analysts see the biggest upside to FY19 consensus forecasts for Charter Hall, Lend Lease and Mirvac ((MGR)). In particular Charter Hall and Mirvac are liked with both Buy rated.

Independent Platforms On A Roll

Independent platforms are en vogue, continuously grabbing more and more market share from AMP ((AMP)) and the banks and recent industry data indicate this process is continuing with Netwealth ((NWL)) having gained 0.5% market share over the past twelve months. For Hub24 ((HUB)) the market share gained is 0.3%.

Analysts at Credit Suisse observe these independents continue to punch above their weight, and they are expected to continue to do just that. It's a matter of being in the right place, at the right time. With more and more financial advisors expected to leave AMP and the banks (also on the back of ceasing the grandfathering of commissions), Credit Suisse is pretty much expecting a tsunami of funds is yet to find its way to these independent specialist platforms.

Credit Suisse analysts don't seem too worried about the impact from current industry conditions on IOOF ((IFL)) for which they retain an Outperform rating. Among the platform operators, Hub24 is most preferred, rated Outperform. Netwealth is only rated Neutral and this, the analysts explicitly explain, is because of its valuation.

Praemium ((PPS)) is not covered by the broker but equally operates in the space, and is equally a beneficiary from current funds flow trends away from AMP and the banks towards independent specialist platforms. Credit Suisse's projections suggest current trends have at least two more years to go and are expected to accelerate significantly throughout that period.

Blending Whisky With Wine

Not related to any research, but a press release rolled in this week that had my attention. The company behind Seppeltsfield Wines Pty Ltd, Barossa-based producer of the 100-year-old Para Tawny, has formed a strategic alliance with ASX-listed Tasmania-based Australian Whisky Holdings ((AWY)).

The wine producer has made an unquantified strategic investment, through a convertible note, with the aim of selling premium single malt whisky to Chinese consumers, while further synergies should be possible through the fact Seppeltsfield already is an established supplier of aged sherry and port barrels to the whisky industry.

Seppeltsfield was founded in 1851 and as such is one of the oldest wineries in Australia. The company has contracts in place for the distribution of its products into China which could be of significant value to fulfill its Tasmanian partner's international ambitions.

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