The Wrap: Financials, Super And A-REITs

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Weekly Broker Wrap: financial institutions; superannuation; A-REITs; and US demographics.

-Further increases in bank shares rely on earnings upgrades
-Level of adviser departures from major superannuation funds unprecedented
-Heightened level of retail A-REIT assets for sale
-Demographic changes in the US support a comparatively brighter long-term outlook
 

By Eva Brocklehurst

Financial Institutions

Loan applications for both homes and businesses appear to be increasing after a soft six-month period and April credit growth data provided by the Reserve Bank of Australia shows the highest monthly home loan growth for the year. Moreover, Shaw and Partners points to a post-election rally in major bank share prices, which has meant they reflect long-term loan growth rates of between 3-4%, consistent with nominal GDP.

Further increases in bank shares now rely on earnings upgrades. Such upgrades, the broker contends, could come from higher loan growth forecasts, an improved outlook for net interest margins and diminishing threat of higher capital requirements by the Reserve Bank of New Zealand. The most problematic of these sources for upgrades is margins, in the broker's view, because a reduction in the cash rate typically lowers deposit margins.

Commonwealth Bank ((CBA)) and National Australia Bank ((NAB)) will pass on the latest cash rate reduction in full to variable home loan rates while the other two majors, Westpac ((WBC)) and ANZ Bank ((ANZ)) will pass on 20 basis points and 18 basis points, respectively. The ability to recover these rate cuts from depositors is likely to be challenging and Shaw and Partners expects earnings upgrades are unlikely as a result.

Ord Minnett observes a considerable shift in sentiment towards banks after the federal election, with a substantial reduction in short interest in the major banking stocks. What remains to be seen is whether the improvement is enough for domestic institutional investors to start narrowing their underweight positions.

The market is now pricing in at least two cuts to official interest rates in 2019 and, with no sign of any let up in mortgage competition, the broker suspects it will remain challenging for the banks for some time. Still, banks are expected to hold onto the most recent gains, with their 6% net dividend yields providing a base of support. In comparison, global banks have been facing rising macro economic concerns relating to trade tensions as well as flattening yield curves.

Superannuation

The level of adviser departures is now unprecedented, Bell Potter points out. The large operators, AMP ((AMP)), IOOF ((IFL)) and the major banks have lost a combined 454 advisers, and if the current loss rate continues they will shed over -20% of their adviser base in just a year. The major inputs to this trend are the final report of the Royal Commission into the financial sector as well as changes in adviser education standards.

IOOF experiences the highest number of departures in May. Bell Potter believes AMP and IOOF are in the midst of a multi-year reform of their respective organisations and AMP is further along the process. IOOF is yet to properly provision for possible client remediation for fee-for-no-service. A review has commenced and the company will provide feedback in August. Bell Potter continues to maintain a Sell rating for both stocks and prefers exposure to Praemium ((PPS)) and Onevue Holdings ((OVH)).

A-REITs

During May, the S&P/ASX 200 A-REIT index delivered a total return of 3.6%, versus the broader market of 1.5%, while Australian bond yields remained low at around 1.5%. Morgans notes investor expectations around interest rates, inflation and economic growth are being re-set lower for longer.

The broker downgrades both Viva Energy REIT ((VVR)) and Centuria Metropolitan Retail ((CMA)) to Hold following the rally in the securities. Morgans maintains an Add ratings on Aventis Group ((AVN)), which offers exposure to large format retail centres and APN Convenience Retail ((AQR)) which owns a portfolio of 70 service stations.

Citi maintains a negative view on retail landlords given the large overhang of assets on the market. The broker estimates potential for around $11bn in disposals of Australian retail assets, or close to three years of typical transaction volume. Selling appears to be broad-based, with the usual buyers, including unlisted funds and offshore investors, having recently turned sellers. Hence, shopping centre values are expected to continue falling.

Book values typically reflect the shift in market pricing once it occurs, Citi points out, which signals the risks remain skewed to the downside. The broker reiterates Sell ratings for Scentre Group ((SCG)), GPT ((GPT)), Shopping Centres Australasia ((SCP)), Charter Hall Retail ((CQR)) and BWP Trust ((BWP)) and maintains a preference for non-retail exposures within the A-REIT sector.

US Demographics

Demographic changes in the US support a comparatively brighter long-term outlook than for other G10 economies, Morgan Stanley assesses. The broker considers the bearish belief that baby boomers are exerting a drag on growth misses the fact that America's youth, by 2034, will become the country's largest cohort.

The analysis suggests that over the next 10 years, home improvement, lodging, automotive maintenance and food at home are relatively better positioned because of the changing demographics. Headwinds are more likely for apparel, home furnishings and food away from home, with apparel the category most likely to be hurt by an ageing population.

This boost in the US from the generational change in many cases is far larger than for other G10 economies. Why? Labour force growth will start to rise on the 2020s and lift potential GDP. Morgan Stanley calculates Census Bureau data underestimates the level of potential GDP in 2040 by 2.4-4.3%. Critically, faster labour force growth should delay, or even ameliorate, the date when Social Security, absent any changes, becomes insolvent.

This youth boom is likely to drive loan growth, where analysis of borrowing habits has shown Millennials (Gen Y) and Generation Z are more like their Baby Boomer grandparents than parents (Generation X).

Total consumption growth is also expected to accelerate, although this includes accelerated expenditure on medical benefits as the population ages. On a more cautious note, consumer discretionary growth for the the younger generations appears unlikely to offset decelerating consumer spending by an ageing population.

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