Weekly Reports | Oct 08 2021
Impact of APRA upon banks and property; platform players; traditional media; and general insurance.
-The impact of APRA intervention upon banks and property
-AMP and IOOF Holdings preferred to Netwealth Group and Hub24
-Has Australian traditional media reached a turning point?
-Two Overweight-rated insurers
By Mark Woodruff
The impact of APRA intervention upon banks and property
APRA has increased the minimum interest rate buffer for banks to apply when assessing the serviceability of home loan applications. This comes after a rise in the share of heavily-indebted borrowers and increased household sector leverage.
The buffer will now be at least 3% above the loan product rate, which compares to the around 2.5% average buffer used formerly.
The regulator points out that on average, investors borrow at higher levels of leverage and may have other existing debts. As a result, they are more likely to be impacted than owner-occupiers. All in all, APRA expects the impact from these measures on aggregate housing credit growth to be “fairly modest”.
Goldman Sachs agrees and remains positive on the banks, retaining its Buy rating for four of the six listed retail banks in National Australia Bank ((NAB)), ANZ Bank ((ANZ)) Westpac Bank ((WBC)) and Bank of Queensland ((BOQ)). The broker points out that a 1% change in housing credit growth changes sector earnings by around 1%.
Macquarie also agrees there will be a modest impact on credit availability from APRA’s move, though cautions it may be enough to achieve its objective if it weakens confidence and moderates property price appreciation.
Given emerging margin pressures in FY22, the broker believes banks may await an opportune time to reprice mortgages and support short-term profits, though over time this approach could result in higher churn.
In the short term, Macquarie feels the sector may benefit from rising bond yields and reasonable relative valuations versus the market, while in the longer term there’s considered limited sector appeal. National Bank is preferred while caution should be applied regarding the premium valuation afforded to Commonwealth Bank ((CBA)).
Meanwhile, JP Morgan agrees on the limited impact from APRA (despite the intervention coming earlier than expected) and had already factored in to forecasts a slowdown in bank loan growth for FY22/23. While Citi generally has the same view of the impact, it comes with a twist in that the change may actually represent a better-than-anticipated outcome in the short-term, given prior fears of a more draconian intervention.
Morgan Stanley leaves its forecast for the major banks' average housing loan growth unchanged and believes further measures will be required by APRA.
In looking at the effect upon the property market, the broker doesn't expect a large impact upon residential sales for Mirvac Group ((MGR)) or Stockland ((SGP)). In each case, their respective land projects are more aimed at the affordable product/owner occupier market. However, it's acknowledged that macroprudential measures may in time weigh upon house prices.
AMP and IOOF Holdings preferred to Netwealth Group and Hub24
Following material underperformance since the Financial Services Royal Commission, it may be time to revisit traditional wealth management/platform players like AMP Ltd ((AMP)) and IOOF Holdings ((IFL)).
The aggregate market value of these two companies is now close to being overtaken by that of leading specialty platform providers (SPP) Netwealth Group ((NWL)) and Hub24 ((HUB)). This is despite having only one quarter of the funds under administration (FUA). Moreover, they are currently trading at record multiples while facing moderating growth prospects. Taking all this into account, Jarden sets an Underweight rating for the two SPPs.
By contrast, the broker has a more upbeat stance on the traditional platform players, with a preference for IOOF Buy) over AMP (Neutral) on valuation grounds and lower execution risks. A more positive stance on AMP would arise should brand-related asset under management (AUM) retention issues ease. Also, the AMP Capital demerger would be viewed favourably if it proceeds without significant dis-synergies.
With further cost-out ahead for the traditional players, and both platform and advice revenues bottoming, the analyst can see growth in earnings supporting value upside off depressed multiples.
In terms of cost-out, the broker sees scope at IOOF for further platform consolidation beyond FY22 to add over $100m to profit, if it can reduce platform costs to 20 basis points or below. This would represent over 25% potential additional value upside. Similarly, it’s estimated that for every -2bps cost reduction across AMP's Australian Wealth Management division, 5% is added to group profit forecasts.
Additionally, Jarden sees longer-term upside for the advice businesses of both companies, as falling advisor numbers leads to demand outstripping supply. An extra boost would arise if onerous regulatory requirements ease.
Perhaps the best summary of the above is achieved by comparing relative 12-month forecast total shareholder returns. The broker estimates no return for Hub24 and 1% for Netwealth, while forecasting 14% and 32% for AMP and IOOF, with the latter receiving a boost from an attractive dividend yield.
Has Australian traditional media reached a turning point?
Australian traditional media could have reached an inflexion point. On a three-year view, the growth in broadcast video on demand (BVOD) may offset the ongoing structural pressures upon traditional linear broadcast TV.
UBS agrees with this assertion from management at Nine Entertainment ((NEC)), and forecasts BVOD growth of 40% in FY22. This implies 9.5% growth in the combined metro free-to-air (FTA) and BVOD markets.