In Brief: Banks, Platform Providers, Supermarkets & Mortgage Stress

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The weekly broker wrap: US banks compared to Australian banks, upside for specialty platform providers, the favoured supermarket & mortgage stress levels.

-Less banking concerns in Australia compared to the US
-Upside potential for ASX-listed specialty platform providers
-Customers prefer Woolworths, Citi chooses Coles 
-Mortgage holder stress levels from rising interest rates 
 

By Mark Woodruff

Less banking concerns in Australia compared to the US

Recent worries about the liquidity and solvency of smaller banks in the US prompts Jarden to investigate whether investors should harbour similar concerns for Australian deposit-taking institutions.

There have been large outflows of deposits for these smaller US banks recently, along with significant mark-to-market losses on holdings of bonds and other debt instruments.

However, a broader long-term decline in deposits has been occurring in the US since April 2022, due to a lack of pass-through to customers of higher interest rates, points out Jarden. Deposits have fallen by -3.6% or -US$655bn since that time.

Jarden sees limited risk of such a deposit flight occurring in Australia, as banks have passed-through 60% of rate hikes to deposit rates compared to only 25% in the US.

Also, US bank customers have a greater incentive than their Australian counterparts to move funds outside of the banking system, suggests the broker, due to the existence of large money market funds (MMFs).

The MMF industry has seen the highest weekly inflows on record, outside the initial covid panic, with total assets now worth 28% of total US bank deposits.

It is the size of this industry, explains Jarden, which allows the scale of deposit outflows from the US banking system to take place. 

By comparison, Australia does not have a large and developed MMF industry, with the nearest comparison being listed cash-ETFs, suggest the analysts, which have less than $4bn in assets. Cash management funds/trusts via investment platforms are another alternative for investors.

Jarden also points out the market value in Australia of short-term securities (such as treasury notes and commercial paper) available for such an industry amounts to only 3.6% of total deposits, versus more than 20% in the US.

A further stressor for US banks is a high reliance on deposit funding, which accounts for around 85% of total liabilities, or 76% excluding long-term deposits. 

In Australia, authorised deposit-taking institutions rely on deposits for just 67% of their funding, with at-call deposits representing 40% of this amount.

Upside potential for ASX-listed specialty platform providers

UBS prefers the specialty platform providers (SPPs), Netwealth Group ((NWL)) and Hub24 ((HUB)), over incumbent platforms due to greater flow potential and a superior earnings growth outlook.

The broker holds this view despite cheaper valuations and cost-out potential for the owners of the incumbent platforms, AMP ((AMP)) and Insignia Financial ((IFL)).

At a recent UBS-hosted Wealth Platforms event, commentary focused on the substantial opportunity for SPPs to transition client balances from the large number of advisers on-boarded over the past few years. 

In also targeting the large scale of wealth residing "off-platform", SPPs are building-out "whole-of-wealth" technology solutions to include non-custodial funds. UBS expects this strategy will create stickier advisers and flows, and provide a stepping stone to transition toward on-platform investment.

Ongoing momentum for investment into managed accounts (MAs) was also discussed at the UBS event.

Investment returns are broadly similar for MAs compared to other portfolios and they ease the regulatory and administrative burden, leading to greater adviser productivity, explain the analysts. Yet, the take up by advisers is still only at around 50%.

MAs contributed 15-20% of platform gross inflows during FY21-22, which the broker expects will continue to rise.

For Netwealth and Hub24, these accounts currently comprise 20% and 42%, respectively, of funds under administration (FUA).

Customer perceptions favour Woolworths, Citi slightly prefers Coles 

When it comes to supermarket perception generally, as well as the online customer experience, the gap has only widened in favour of Woolworths Group ((WOW)) over Coles Group ((COL)), according to Citi’s most recent customer survey.

The broker sees ongoing benefits from food inflation for both Buy-rated companies, with a slight leaning towards Coles, due to generally lower market expectations for earnings.

While working from home has moderated slightly, Citi notes an around 3% structural uplift for grocery sales post the onset of covid.

Despite its best efforts to close the gap with Woolworths on e-commerce, the performance of Coles appears to have deteriorated across all metrics, according to the survey.

Online execution is important, stresses Citi, as omni-channel customers have a higher grocery spend than in-store-only shoppers. Moreover, a greater exposure to online typically leads to greater overall customer loyalty.

Mortgage holder stress levels from rising interest rates 

In the three months to February 2023, a period which included a cumulative 50bps rise in official interest rates to 3.35%, the proportion of mortgage holders considered ‘At Risk’ of mortgage stress rose to its highest level for over a decade.

Since February, the RBA has increased interest rates once more by 25bps to 3.60%.

In Roy Morgan research, ‘At Risk’ describes a scenario in which mortgage repayments are greater than a certain percentage of household income.

‘Extremely at Risk’ describes the situation when just the ‘interest only’ component of the mortgage is over a certain proportion of household income.

While the number of Australians ‘At Risk’ of mortgage stress has increased by 514,000 (25.3% of mortgage holders) over the last year, this number reached 1,455,000 (35.6%) during the Global Financial Crisis in early 2009.

The number of mortgage holders considered ‘Extremely At Risk’ is 735,000 in the three months to February, significantly above the long-term average over the last 15 years, nominal terms, of 659,000. However 735,000 today represents 15.7% of all mortgage holders, while the 659,000 average represents 15.9%.

In a scenario whereby the cash rate increases to 4.10% after additional interest rates increases of 25bps in both April and May, Roy Morgan forecasts the ‘At Risk’ number will climb to around 31% from the 25.3% revealed in its February research, when rates were -75bps lower.

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