The Wrap: Oz Wealth, Banks & Insurers

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Weekly Broker Wrap: Australian wealth; banks; insurers; and BNPL.

-Per capita, Australian gross wealth has dropped in the last six months
-Downside pressure continues for banks
-Front to back book variations a growing concern for general insurers
-BNPL appears to have minimal impact on credit or consumption growth
 

By Eva Brocklehurst

Australian Wealth

How wealthy are Australians? Attempts to measure this have frequently looked at income, or tracked debt, while others have assessed assets. Now, Roy Morgan's Wealth Report 2019 adds more colour to the picture.

The report offers detailed data on Australian Net Wealth by calculating personal assets and subtracting personal debt. The report suggests this information matters because wealth and the way it is distributed is linked to economic resilience.

From its long-running and extensive study of consumer financial behaviour Roy Morgan has found well-established links connecting overall wealth and the distribution of wealth to national well-being.

So, the report reveals Australian per capita gross wealth increased in real terms between 2007 and June 2019 by 20.9% but has stagnated in the last six months. Per capita gross wealth dropped by around -1.4% from the first to the second quarter of 2019.

Although debt is growing, it is growing more slowly than the growth in assets. In real terms, over the 2007-19 period per capita debt increased 13.7% while assets grew 20.9%.

The richest 10% of a population hold 47% of the wealth globally and this is matched, almost perfectly, in Australia, Roy Morgan highlights. Around 50% of the population, the lowest five deciles, have just 3.6% of net wealth and inequality has increased rather than decreased over the period.

Banks

Over the medium term, Macquarie expects margin benefits of 3-5 basis points from mortgage re-pricing will be competed away if the front book (new customer) rates of the banks remain competitive. Despite mortgage re-pricing benefits, the broker continues to envisage downside earnings pressure from lower interest rates and the narrowing of the front to back (existing customer) book spread.

Following the June and July official rate cuts, the price gap between the front to back book widened round 50 basis points for the major banks and this gap is likely to extend further after the October 2019 re-pricing. Among the major banks, Macquarie believes Commonwealth Bank ((CBA)) is the most affected while ANZ Bank ((ANZ)) is the least.

The broker also points out the sector, ex CBA, is facing a -$13bn capital shortfall, and capital is likely to increase from current levels or banks will look to optimise portfolios. Westpac Bank ((WBC)) is expected to cut its dividend, supplemented by an underwritten dividend reinvestment plan at the upcoming result while National Australia Bank ((NAB)) is likely to raise capital with an underwritten DRP.

JPMorgan finds the impact of the federal government's First Home Loan Deposit Scheme is modest, noting that major banks will be limited in the extent of their participation in the scheme. Although one would expect the scheme to drive higher house prices, it appears to the broker to be more targeted than previous first home buyer assistance programs.

The scheme will remove the need for lenders mortgage insurance for home loans written between 80% and 95% of the loan-to-value ratio. Hence, the government will effectively guarantee up to 15% of the property purchase price. The scheme will be limited to 10,000 such loans per annum and commence January 1 2020. It will apply to owner occupiers paying principal & interest loans and house price caps will also apply.

Insurance

Bell Potter observes the general insurers have weathered the Hayne Royal Commission better than the banks, probably because of a cleaner record in dealing with, and ultimately settling, customer claims. Underlying fundamentals are also much stronger.

Risk management is relatively stronger, including the use of capital efficient reinsurance arrangements and fewer operating constraints. There is also no correlation between unemployment and premium growth.

The broker retains a positive view of the general insurers, noting little dependency on wholesale funding and much stronger capital levels, which are likely to lead to capital returns and remains overweight on the general insurance sector.

Still, front to back book variance remains a large and growing concern for general insurers and a challenge that is not diminishing. Hence, Macquarie believes Insurance Australia Group ((IAG)) and Suncorp ((SUN)) are most at risk, as most of the variance resides with them.

Issues highlighted by the ESLIM Report on insurance pricing in NSW underline the broker's concerns. The data from ESLIM shows average base premiums for renewals are tracking higher than for new business.

The monthly spread of 34.6% for December 2018 was the widest at any point during the data collection period. Macquarie estimates, if only 10% of back-book customers were re-priced at front book levels, this could remove -$150-250m in gross written premium from the Australian insurance market.

The insurance industry is looking to the technology to streamline the acquisition of customers and the supply chain and, the broker notes, increased attention is being given to blockchain.

Benefits of technology appear weighted towards larger commercial risks, while supply chain solutions are primarily addressed by existing technology. Should the industry pursue blockchain options, Macquarie suggests a most efficient solution can be generated with brokers at the centre.

This may not be enough to change the complexion of an insurer's overall cost base and the broker suspects the benefits and returns could be limited to the likes of home and motor insurers, particularly in developed markets

QBE Insurance ((QBE)) is a potential beneficiary, given a global customer base and supply chain as well as involvement in the reinsurance market. However, Macquarie suggests the "holy grail" is many years down the track, with much investment considered likely.

Buy Now Pay Later

The boom in Buy Now Pay Later (BNPL) purchasing is having a material impact on core retail businesses but, UBS suggests, is insignificant for consumption or credit growth.

By 2021 expenditure via BNPL as a share of total nominal consumption is set to double, to 1% and more significantly, to almost 4% of retail sales. For core retail, excluding food and eating out, use of BNPL is set to lift to around 8% of sales.

UBS has evidence that 64% of customers consider BNPL credit but yet this is not counted in household debt data. Nevertheless, even assuming these receivables are debt the current $1bn outstanding is a tiny percentage of household liabilities or personal credit.

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