In Brief: Banks & Branches, Catastrophe Insurance, Asset Managers

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Weekly broker wrap: bank branches decline, high perils costs, growth outlook for asset managers.

-Banks shrink their physical presence as a cost saving measure
-Analysts question if insurers are adequately prepared for another La Nina year
-Morgan Stanley highlights growth opportunities for domestic asset managers

By Danielle Austin

Bank branches decline amid digital uptake

The number of brick and mortar bank branches continues to shrink according to data from the Australian Prudential Regulation Authority (APRA). The Regulation Authority’s Point of Presence data suggests branch decline continues at -7.0% per annum, equating to a reduction of 309 branches in the twelve months to June. According to JP Morgan, this trend is in line with a declining trend in recent years, driven by a greater take-up of digital banking services. 

The broker expects this trend will continue as banks look to offset cost pressures, and highlights major banks appear to be reducing their networks faster than other banks. While Westpac Bank ((WBC)) reported the largest network reduction in 2022 with a -10% decline, alongside Commonwealth Bank ((CBA)) it retains the largest network, meaning these banks have more scope for reduction, and subsequent cost savings, moving forward. 

ANZ Bank ((ANZ)) had the lowest reduction in 2022, but has outpaced peers with a -40% network reduction over the last five years compared to a less than -30% reduction from Commonwealth Bank, Westpac Bank and National Bank ((NAB)). 

While fewer branches will equate to cost savings, with an average operating cost  of $1m per branch according to JP Morgan, the broker highlights fewer physical touchpoints for customers will increase mortgage applications through brokers, and therefore broker commissions. 

La Nina could leave insurers under-prepared for perils costs

Insurers appear to remain unprepared for real perils costs despite lifting peril allowances considerably over the last ten years. With another La Nina year potentially ahead, Credit Suisse has highlighted that insurers have exceeded their perils allowance in the last six La Nina years.

The early outlook for FY23 is a mixed bag, with east coast flooding recently updated to a catastrophe event and insurers reporting the highest winter claims since 2016. More positively, La Nina is expected to be more moderate and to impact over a shorter duration than in previous years, which could support more manageable perils costs. Allowances for FY23 are also 1% higher than for FY22, but the broker notes the increase comes with less favourable reinsurance arrangements. 

At current perils allowances, Credit Suisse finds earnings risk skewed to the downside. The broker highlights every -1% insurance margin decline equates to -6.5% risk to net profit for Insurance Australia Group ((IAG)) and -5.5% risk for Suncorp Group ((SUN)). By company, Suncorp’s insurance margin misses of -1.0% in both FY21 and FY22 was preferable to IAG’s -1.0% and -4.5%, but Suncorp has demonstrated more volatility in the long-term. 

Growth on the horizon for Australian asset managers

Strong outflows across the industry have seen domestic asset managers significantly de-rate since early 2021, but Morgan Stanley anticipates stabilisation of flows ahead. Prior to 2021 Australian asset managers had traded at a premium to global peers, but by new money flows in the first half of 2022, all domestic asset managers in Morgan Stanley’s coverage ranked in the bottom ten globally.

Following peak outflows of -9.5% in March, Morgan Stanley reports improvement to -5.0% in June. While noting some risk remains from UK-related outflows, the broker sees several growth options on offer for asset managers, including in alternative asset classes and ESG. 

GQG Partners ((GQG)) has become Morgan Stanley’s preferred asset manager for its strong inflows and exposure to global equities, which continue to take share from domestic equities. The broker also likes Perpetual ((PPT)) for its diverse growth options, but is Equal-Weight rated on Platinum Asset Management ((PTM)), Plenti Group ((PTL)) and Janus Henderson Group ((JHG)), finding flow improvement is already captured in their share prices. Least preferred is Magellan Financial Group ((MFG)) as the broker feels downside risks are not accounted for in the valuation.
 

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