Weekly Reports | Sep 14 2018
Weekly Broker Wrap: insurers; banks; telcos; and consumers.
-New operators taking market share in general insurance
-Macquarie suggests challenging operating conditions captured in bank valuations
-Merged TPG/Vodafone likely to raise competitive stakes in mobile
-Consumers using savings to support retail activity
By Eva Brocklehurst
Challenger brands are not the only ones taking market share in insurance. Automotive clubs such as RACQ & RAC, and international operators that are expanding risk appetite, such as AIG and Zurich, are taking share of personal motor and home products at the expense of Suncorp ((SUN)) and Insurance Australia Group ((IAG)).
Youi has revealed a 24-month trend of slowing customer acquisition and is not the face of competitive tension in Australia any more, Macquarie suggests. Smaller insurers that have the technology and products are outperforming.
The broker suspects lost volumes for IAG and Suncorp could place additional pressure on their gross expense ratios. Macquarie considers the sector is overvalued at current levels and maintains Underperform ratings on both stocks.
For the second consecutive year, Youi Australia experienced relatively stagnant gross written premium growth versus the mid-single digit growth seen in domestic general insurers. While Youi's profit margins are expanding, UBS notes this is at the expense of top line growth.
The company's strategy appears focused around gradual expansion into CTP and commercial lines rather than aggressive action on personal lines. The broker believes margin expansion in commercial lines will become increasingly important into FY20.
While there may be risks from the Royal Commission, Citi suggests general insurance remains the most attractive part of the sector. The broker believes QBE Insurance ((QBE)) currently offers the best value and, while the risk profile is elevated, further progress is likely, and there is meaningful upside if forecasts are delivered. Citi retains a Buy rating for QBE and Neutral for the others in the sector.
Achieving a 10% return-on-equity target is now in sharp focus for Suncorp in FY19 but costs need to be removed, Citi suggests. The sale of the life company should mean capital is returned but the broker considers the value of the business is now less attractive. The valuation of IAG is also a stumbling block for Citi.
Macquarie believes the challenging operating environment for banks is captured in current valuations. Compliance related expenses are likely to continue increasing as banks respond to the Royal Commission recommendations. Regulators appear largely done with implementing changes relating to housing underwriting, and the broker notes borrowing capacity has reduced by -15-25% since 2015.
Regulators also recognise the need for more uniform regulation. Macquarie suggests potential changes to negative gearing could have a significant impact on property prices and borrowing capacity as lenders remove negative gearing benefits from calculations. Remediation and system changes are also likely to be costly and reduce, in the short term, a bank's ability to benefit from automation.
National Australia Bank ((NAB)) has broken ranks, announcing it will leave its standard variable mortgage rate unchanged at 5.24%. Morgan Stanley believes this decision indicates that the scrutiny on conduct and competition is affecting management's decision making and this will weigh on profitability and the share price.
The bank has not ruled out future re-pricing and will continue to regularly review its rates. Morgan Stanley also doubts the bank's lower rate will drive material increase in new loans, given the amount of front-book discounting, although it may reduce the risk of switching by existing customers.