Weekly Reports | Feb 15 2019
Weekly Broker Wrap: Banking Royal Commission; traditional media; RBA cash rate; housing; and aged care.
-Challenges for traditional media advertising, yet better trends expected
-NAB economists remove cash rate hike from forecast horizon
-Reduced home loan approvals, UBS expects house prices to fall more
-Aged care funding announced, expected to boost outcomes for listed providers
By Eva Brocklehurst
Banking RC Fall-out
Distrust in the big four banks in Australia has increased and National Australia Bank ((NAB)) is the main victim of the final report of Commissioner Kenneth Hayne. While all of the large banks have suffered declines in their net trust score (NTS) in the latest Roy Morgan survey, NAB is now the most distrusted bank brand in Australia.
The level of trust in NAB has dropped to 11.5% from 18.5%, delivering the banking sector's worst NTS of -42.2%, while the other three major brands are in the -20% region.
Advertising markets weakened over the December quarter, as expenditure by the banking/finance sector and government softened. Metro free-to-air TV advertising revenue declined -5% in the December half year versus growth of 3.8% in the June half year, 2018.
Although conditions are challenging, Macquarie's analysis of prior election periods raises hopes for better trends in the current half-year, particularly for TV. Part of the slowdown in TV is a migration of cricket content and audience to Foxtel, although broad weakness stems from economic uncertainty.
The broker expects some assistance in the current half-year from election expenditure and possibly also an increased investment from banks. All up, for the June half year the broker forecasts TV and radio advertising markets to be down -1% and up 1%, respectively.
While not immune from a broader slowdown, Macquarie considers the outdoor advertising segment well-positioned and there is scope for improved operating leverage in 2019 following the recent investment in digital platforms.
Reserve Bank Cash Rate
National Australia Bank economists have removed an official rate increase in late 2020 from forecasts. The economists now expect the cash rate to remain on hold over the forecast horizon. Moreover, based on the balance of risks, the next move could well be down, maybe even as early as the second half of 2019.
Labour conditions are positive but inflation is weak. Growth was solid in the first half of 2018 but slowed in the second half and high-frequency indicators point to another soft GDP print in the December quarter.
The economists have not materially changed forecasts for growth and expect a final outcome of 2.9% for GDP over 2018 and a slowing to 2.4% in 2019. House prices are expected to continue declining in Sydney and Melbourne but in an orderly fashion.
The risk to households is driven by other headwinds, namely weak income growth. A relatively sharp decline in residential building activity related to the cooling of the housing market is factored into the equation. Hence, with inflation weak and growth weaker than expected, the risk is that the Reserve Bank (RBA) will bolster the economy should the labour market show any signs of deterioration, or consumer spending weakens further.
UBS notes home loan approvals in December slumped -5.9% month on month, and were down -19.8% year-on-year, which is the worst outcome since the GFC. While investor loans continued to weaken in the month, owner occupiers were also softer and there were similar drops across both new and established homes.
What is more of a worry, first home buyers retraced sharply after a prior recovery, although still hold a 16% share of total loans, the highest since 2012. UBS believes the acceleration in the reduction in home loan approvals means tighter credit is playing out.
The broker downgrades a long-held forecast for the peak-to-trough drop in home loans to -25% with an increased risk of -30%, from -20% with a risk of -30%. The broker also expects a greater drop in house prices, to -14%, even assuming the RBA cuts the cash rate. This forecast is double the -7% decline that has occurred so far.
The federal government has announced a new $662m funding package for the aged care sector. At this stage details around the timing and implementation mechanism remain scarce, UBS notes, in terms of residential care.
A $320m general subsidy boost for residential aged care operators has been flagged for FY19. If this represents annual recurrent funding, the broker estimates a 3% tailwind for operators' government revenues.
If it is cumulative, the tailwind is less material. While noting the first Royal Commission hearings into the sector have commenced and 2019 is an election year, UBS is unsure about the government's longer-term position on the sector's regulation and funding.
Ord Minnett suggests the increased funding that has been announced should defray the rising cost of care and boost FY20 outcomes for listed providers. The broker continues to expect the Royal Commission hearings will be challenging, particularly regarding cases of inadequate care.
Final recommendations should be supportive of the sector, Ord Minnett suspects, such as increased funding and measures designed to deliver improved care. The broker argues that Japara Healthcare ((JHC)) should have the highest upside potential as it has the lowest operating earnings margin per place.
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