Financial Platforms Eyeing Costs, Consolidation

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Specialist financial platforms are expected to cut down on costs in FY21, with increasing cash balances expected to offset the hit to margins from rate cuts

-Investment is the highest growing segment of the financial platform industry
-The notable shift towards specialist platforms continues
-Consolidation may become a prominent theme in future

By Angelique Thakur

Decline in funds under administration in the March quarter

Up to March 31, 2020, the Australian financial platform market had about $777bn of funds under administration (FUA), down -12.6% on a quarterly basis and -7.1% over the year. The decline was driven by negative market movements rather than net outflows, highlights Credit Suisse.

Flows into the industry amounted to about $1.6bn in the March quarter and were skewed towards the small specialist platforms, while inflows over the year to March 2020 stand at about $3bn.

Netwealth Group ((NWL)) and Hub24 ((HUB)) enjoyed the most inflows, managing to capture share from the major institutional platforms which generally saw outflows.

However, Credit Suisse expects these inflows to be short-lived, with the June quarter expected to see outflows on account of superannuation withdrawals and lower contributions.

Another way to look at the industry is via its segments. Out of the four segments – investment, personal super, corporate super and pension – the investment segment has grown the fastest. This growth is attributable to strong inflows, a stark difference from other segments which have been witnessing outflows over the last year.

However, while the investment segment attracted the highest level of inflows, it has also experienced the largest negative market movements, notes Credit Suisse, which reflects a higher allocation to equities/risk assets.

Shift to Specialist platforms:

Market share for specialist platforms including Netwealth Group, Hub24, OneVue Holdings ((OVH)), Praemium ((PPS)), Xplore Wealth ((XPL)) and PowerWrap ((PWL)) has increased to 9.8% in March 2020 from 1.2% in March 2014.

Institutional platforms which include AMP ((AMP)), Macquarie Group ((MQG)), IOOF Holdings ((IFL)) and major banks saw market share eroding to 82.1% from 90.4% over the same period. Credit Suisse expects this trend to continue with specialist platforms capturing inflows way above their market share of FUA.

Towards Consolidation 

The platform industry could be heading towards consolidation, suggests Credit Suisse. 

Private equity firm KKR recently announced the acquisition of a 55% stake in Colonial First State from the Commonwealth Bank for $1.7bn. The firm is also a potential bidder for MLC Wealth owned by National Australia Bank ((NAB)). In June, technology company Iress ((IRE)) announced it would acquire specialist platform operator OneVue Holdings.

Bell Potter highlights this development may have some implications for Netwealth given it uses Iress’s technology for its investment platform. More clarity on this is expected at the quarterly/FY20 results briefing.

Credit Suisse expects a tie-up between Colonial First State and MLC Wealth. The broker considers the industry has come a long way since the MLC/AXA merger was blocked a decade ago on competitive grounds, and if the merger were to take place, it will likely proceed given the emergence of more competitive platforms.

Citi considers industry consolidation may reduce the competitive intensity for Netwealth and Hub24, impacting them in a positive way.

June quarter and FY20 results forecasts:

The June quarter will see increasing restrictions and uncertainty due to covid-19, anticipates Citi, expecting both companies to report weak fourth-quarter flows and the impact to linger well into the first half of FY21.

Net flows for Netwealth are predicted to be down -60% (quarter on quarter) at $1.2bn while for Hub24, fourth-quarter flows are forecasted at $0.9bn, down -4%. This can be explained by advisors focusing more on existing customers with less new business coming in along with slowing transition activity.

Morgans is more optimistic and expects Netwealth’s fourth-quarter inflows to be around $2.2bn while expecting around $1.05bn for Hub24. Increased trading activity in the fourth quarter will offset the material hit to Hub24’s cash margins, predicts Morgans.

On account of the ASX200 gaining more than 16% over the June quarter, Bell Potter has upgraded Netwealth’s FY20 forecasts towards the top end of the company's guidance with FY20 revenue now estimated to be $119.7m along with net-flows forecasted at $8.6bn in FUA. Morgans considers the company’s guidance to be conservative and expects more.

For Praemium, Bell Potter expects a rather mixed fourth quarter with slowdown in net outflows from its ANZ Private Bank relationship, and with the international business experiencing decreasing momentum. The company is still expected to benefit from market gains, with Bell Potter increasing earnings estimates for FY20-22.

Lower margins predicted in FY21

Credit Suisse has upgraded earnings forecasts for both Hub24 and Netwealth for FY20-22, expecting higher net flows in the first half of FY21. Citi, on the other hand, expects FY21 earnings growth for both platforms to be impacted by a slowdown in platform switching and reduction in cash margins.

Keeping in mind the macroeconomic uncertainty, Citi feels both Netwealth and Hub24 may adopt a more conservative outlook on costs in FY21, although the broker expects both will continue to invest in strategic projects and technology.

Then there are also the rate cuts form the RBA which Morgans expects will lower earnings margins. The broker anticipates the full impact of the RBA’s rate cut will be felt in FY21 by both Netwealth and Hub24.

Citi goes one step further and expects the margins to continue declining in FY22, predicting an overall decline in Netwealth’s revenue margin to 36bps while Hub24's is forecasted to decline to 38bps in FY22.

The saving grace may be higher cash levels, points out Morgans. Cash levels have been increasing for both platforms since December 2019 and if sustained they would more than offset the impact of the rate cut. In fact, an increase in cash levels for Netwealth to 8.5% from 7% will neutralise any impact of the lower cash margins, calculates Morgans.

For Praemium, Bell Potter expects FY21 to bring greater operating leverage, led by a broader product offering and sales momentum.

Netwealth has been downgraded to Underperform by Credit Suisse on account of its outperformance over the last quarter, while Citi maintains its Buy rating but prefers Hub24 over Netwealth. Morgans rates Netwealth as Hold, considering it to be fully valued. Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, continues to rate Netwealth as Hold.

Targets range from $8.20 (Morgans) to $9.10 (Bell Potter). The latter is not included in FNArena's consensus target of $7.78.

Credit Suisse has also downgraded Hub24 to Neutral from Outperform while Citi still prefers the stock. Both Credit Suisse and Citi consider Hub24 to be the better investment option because of a cheaper valuation. Morgans rates Hub24 as Add expecting flows to drive growth in the short term. Targets range from $10.99 (Citi) to $12.00 (Credit Suisse), with FNArena's consensus target currently at $11.77.

Credit Suisse has Outperform ratings on AMP ((AMP)) and IOOF Holdings ((IFL)) due to integration projects which present upside to later year forecasts.

News just in: A joint ASX announcement reports Praemium has entered into an agreement with wealth manager Powerwrap ((PWL)) which will see Praemium fully but conditionally take over Powerwarp in a cash/scrip offering. Powerwrap's board has recommended the offer to shareholders. 

The indicative price for Powerwrap shares, which last closed at 17.5c, is 26.44c, but fluid given the scrip swap element.

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