In Brief: House Prices; Banks; Wealth Platforms

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This story features BANK OF QUEENSLAND LIMITED, and other companies.
For more info SHARE ANALYSIS: BOQ
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

Jarden wrong on house prices; pressure to bear on bank NIMs; disruptors winning in wealth management; RBNZ clamps down on general insurers; emerging market growth weakens.

-Getting a house price forecast very wrong
-Margin pressures on banks
-The rise of disruptor wealth platforms
-General insurers face tougher NZ regulations
-Slow China impacting on EM growth

Jarden’s Mea Culpa on House Prices

Back in February, when the RBA returned from the summer break with a newfound hawkish determination, extending a hiking cycle which was thought to be near its end, Jarden downgraded its forecasts for house prices to a -20-25% fall.

The key driver of this was an assumed -30% fall in borrowing capacity which was expected to flow through to house prices. Since then, house prices have increased 5%, recovering half of a record -10% peak-to-trough decline.

While borrowing capacity collapsed, as expected, house prices have shown unexpected resilience. Jarden poses the rhetorical question: How did we get it so wrong?

Jarden expected the 20-plus year relationship between borrowing power and prices, which implies the average household can buy the average home, to hold. Instead, tight supply and improving sentiment have driven a solid recovery and we seem to be entering an environment in which only high-income households (or those with significant family assistance) can buy – in other words, the end of the “great Australian dream”.

Jarden notes at the end of 2022, the RBA had begun to sound more dovish, hence the surprise when it flipped to hawkish again in early 2023. Late 2022 was when interest rate and house price expectations troughed. This shift in sentiment, combined with record low listings, saw prices turn quickly.

Importantly, a key difference between the most recent downturn and the 2018-19 correction is supply. While months of supply peaked at eight in 2019, in 2022 it peaked at just four.

Jarden highlights it's only higher income earners, and the those with access to the Bank of Mum & Dad, driving the recovery. The average borrower's income has increased at more than 2x the pace of the average household, up 30% since 2019.

Outright foreign buying has not been a key driver of the housing market, but Jarden does suggest the surge in migration and ensuing rental/housing crisis is driving some domestic buyers to bring forward purchases and increasing demand in a supply-constrained market.

Jarden continues to see downside risk to house prices given the gap between prices and borrowing capacity, along with the worst affordability on record, but “reluctantly” upgrades forecasts, now expecting house prices to rise 5-7% in 2023 and 5% in 2024 to make a new record high by mid-2024.

NIM Pressure for Banks

Goldman Sachs has undertaken a full reassessment of bank earnings forecasts.

The broker now forecasts system housing credit growth to trough at around 4% (previously 1%), outperforming system business credit growth over the course of FY24-25. While there has been some relief in mortgage competition, Goldman does not expect this to be sustained over the remainder of 2023 and into 2024, and with ongoing deposit pressures, now forecasts FY24 net interest margins (NIM) down -8 basis points and FY25 down -6.

The broker increases FY24 expense assumptions, largely driven by elevated non-staff inflation, which contributes to an FY24-25 fall in profit growth (pre-provision operating profit) of -6% and -1% year on year. Goldman expects bad & doubtful debts to be more benign than previously, which adds 3% to FY24 earnings per share.

Separately, Goldman Sachs has downgraded Bank of Queensland ((BOQ)) to Sell with a $5.60 target price.

While the company’s transformation program is the right long-term strategy to deliver a stronger and simpler bank, Goldman believes it does leave the bank more exposed to inflation in non-staff costs. While management appears to be responding to these issues and will announce details of a productivity initiative at its FY23 result, the broker is concerned by the operational risks and cost pressures involved in undertaking such an initiative.

The bank’s volume momentum remains weak, the broker notes, and while this is partly due to management’s efforts to protect profitability, Bank of Queensland has the only FY24 NIM that consensus currently expects to be below where forecasts were at the beginning of 2021, before rates started to rise.

Wealth Management Fragments

Industry data for June quarter retail wealth funds flows have provided industry perspective to companies covered by UBS that have already disclosed flows. Industry net funds flows recovered after a weak March quarter and it is believed momentum has continued into the September quarter.

Specialist platforms (SPP) continue to outperform incumbents' net flows by some margin, UBS notes. Within the sector, the broker retains a preference for specialists Netwealth Group ((NWL)) and Hub24 ((HUB)) relative to incumbents Insignia Financial ((IFL)) and AMP ((AMP)).

Looking ahead, UBS expect flows to continue the gradual improvement, driven by more defensive asset classes (relatively high yields at low risk) and greater visibility of debt costs.

The long-term market share skew away from incumbents accelerated during the June quarter, the broker notes. All of the incumbents, with the exception of Macquarie Group ((MQG)), experienced net outflows. The funds under management market share of incumbents fell below 68%, albeit this was accelerated by BT's super fund sale.

The industry data release supports UBS’ view the retail wealth platforms industry continues to fragment. The broker believes the growth runway for SPPs is very long, and despite several years of strong growth, Netwealth and Hub24 penetration levels remain low.

At this stage, the broker prefers Netwealth over Hub24.

Generally Speaking

The Reserve Bank of New Zealand has released its final policy consultation for its insurance review, containing proposals following options outlined over previous consultation rounds.

For Australian general insurers, Jarden believes key risks largely relate to higher regulatory costs as the RBNZ takes a more “proactive and intensive” supervisory approach, potential reductions in group capital and cost efficiencies, and dividend restrictions when an insurance group is under pressure.

While capital and cost risks here are asymmetric, with the GIs well capitalised, the RBNZ is likely to be mindful in the broker’s view of not exacerbating affordability issues and implementation still some time off (maybe the second half 2025).

Potential impacts appear low with accelerating premium rates underpinning Jarden’s positive sector stance.

New Zealand is highly dependent on offshore-owned GIs, the broker notes, which represent 85% of gross written premium. In Jarden’s view, greater regulatory oversight is likely to result in higher regulatory costs. Overall, while capital and costs could rise in New Zealand, the broker notes the RBNZ is still to finalise proposals and provide draft standards, with implementation not due until early 2025.

Australian-listed GI exposure to New Zealand is manageable, Jarden declares. Insurance Australia Group ((IAG)) accounts for 22% of gross written premium, Suncorp Group ((SUN)) 18% and QBE Insurance ((QBE)) 2%. Given strong group capital coverage levels (including NZ subsidiaries), risks appear to be relatively moderate.

Bears back for Emerging Markets

Emerging Markets have been enjoying a kind of “Goldilocks” environment recently, suggests Citi – upside surprises to growth, downside surprises to CPI. The latter have, however, gone into reverse recently.

Strong domestic demand in Emerging Markets ex-China, rising energy and food prices, the recent US dollar appreciation and the increasing likelihood of a strong El Nino are further threats to the disinflation narrative.

Citi’s base case is nevertheless for disinflation to continue, albeit on a possibly shallower path. Domestic demand is likely to weaken and the broker continues to doubt China will deliver a big stimulus. While keeping a lid on inflation risks, this will eventually undermine EM growth prospects too.

Fundamental to Citi’s view is pessimism about China’s growth prospect, not only in the next quarters, but for years to come. It’s at least conceivable that China’s growth rate in recent years has been above potential and that hence a noticeable deceleration is on the cards – in addition to a less import-intensive economic model.

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