The Wrap: Banks, Slots, China And Contractors

Weekly Reports | Dec 07 2018

Weekly Broker Wrap: banks; slot manufacturers; China consumer; contractors; Alliance Minerals; and GR Engineering.

-Conflicting signals for Australia's banking sector
-Aristocrat Leisure continues to lead slot manufacturer performance
-New period of grace for cross-border e-commerce in China factored in
-Activity levels improve for contractor sector

 

By Eva Brocklehurst

Banks

Profitability across mortgage portfolios has improved. Macquarie reports the Lendi Mortgage Pricing Index shows owner occupier rates in November were around three basis points higher than the second half FY18 average.

This survey also indicates that while competition for owner occupier product is intense, banks have not passed on the full amount of re-pricing to new customers. Macquarie also notes the funding gap continues to widen as deposit growth moderates further.

Morgan Stanley is negative on major banks and expects growth to slow to around 2% in FY19 and FY20. System housing loan growth dropped to 5.3% in October, down from 7% a year ago.

While major bank growth is slowing in terms of owner occupier loans, it is slowing even faster for investor property lending. The broker suggests this is negative for bank margins, given lower prices and more front book competition in owner occupier loans.

Morgan Stanley believes the effect of restrictions on high debt-to-income customers and more scrutiny on income and expenses is now materialising. This underpins an expectation that major banks will continue to lose share.

In contrast, market share losses from the major banks are starting to abate, in Macquarie's opinion, and the slowdown in system credit growth is likely to be stemming from the non-banks implementing tighter lending standards.

Morgan Stanley points out system credit is a broad measure that captures business as well as corporate and institutional loans. The broker cites evidence that leverage to stronger business banking revenue has decreased for major banks in recent years, as they have skewed the business mix towards retail and mortgage lending.

Credit Suisse remains tactically constructive on the sector, believing the market is over estimating the structural impact of the Hayne Royal Commission. Together with margin benefits in the first half, the broker believes there will be a net benefit to earnings after an additional round of remediation in FY19.

This should mean the current -40% discount to the ASX industrials narrows. In the medium term, the prospect of a change in government is likely to limit a substantial re-rating of the sector, the broker suggests, until more clarity is forthcoming.

Slot Manufacturers

Macquarie has reviewed the performance of slot machine games within Australia over October. Overall, Aristocrat Leisure's ((ALL)) new games are performing 60% above floor average. The Dragon series leads performance across all states.

Meanwhile, games released over the last 12 months by Ainsworth Game ((AGI)) have performed below floor averages in October. Macquarie observes this underperformance continues to affect sales.

That said, the company intends to step up R&D investment, which the broker considers is a positive development although does not expect increased levels of product for 12-24 months. The ongoing outperformance of the Aristocrat land-based slot products in Australia makes Macquarie confident that a greater market share can be obtained in North America.

China Consumer

China's finance ministry has announced a new expanded list and extended the period of grace for cross-border e-commerce. The new list will be effective from January 1, 2019 and the grace period will be in place until March 31, 2019.

The list outlines goods that will be treated as personal items and, Citi notes, appears to include infant formula and a variety of health supplements, although it is currently unclear how this will apply to the broader health food category.


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