Weekly Broker Wrap: Banks, Advertising, Wages And Energy Retailing

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

-CBA's deposit base stands out
-Advertising reliant on retail
-Risks for consumption growth
-Snowy Hydro privatisation?
 

By Eva Brocklehurst

Macquarie's analysis of Australian banks reveals Commonwealth Bank's ((CBA)) deposit base delivers $935m in profit and the bank remains a clear leader over its closest peer, Westpac  ((WBC)), at $550m. As a result CBA remains the broker's top pick. ANZ Bank ((ANZ)) has a retail deposit base around half that of CBA but its customers do have higher average balances, leading to an overall profit per deposit customer that heads the sector. ANZ also has more exposure to the older de-leveraging demographic segments, while softer credit growth in Victoria stands the bank in good stead from a deposit growth perspective. The broker retains an Underperform rating on ANZ given concerns around Asian exposure.

Of most concern to Macquarie is Westpac's lower quality customer base. Westpac appears to have favourable deposit trends but is less competitive on savings account considerations. Hence, Macquarie has recently downgraded to Neutral from Outperform. National Australia Bank's ((NAB)) deposit base is the smallest by value but it does have the largest average balance by customer. To complicate the picture, NAB also has the lowest share of wallet and lowest spread, in that it pays more for deposits than the other majors. In a similar way to Westpac, Macquarie expects idiosyncratic factors to dominate NAB's deposit growth outlook. The broker does acknowledge other positive catalysts for NAB around divestment and the restoration of domestic business momentum.

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Media agency bookings indicate the advertising market in the first half of FY15 is flat to slightly weaker, with August down by around 3%, primarily because of comparisons with last year's spending on the federal election, a benefit largely captured by TV. JP Morgan considers the underlying market is weak. The most positive aspect in the data was that retail, the largest media spending category, grew 3.2% in August, reversing recent weakness. Metro TV spending declined by 6.0% and the structurally challenged newspaper and magazine sectors declined by 14.5% and 16.1% respectively. Digital advertising spending grew 5.7% in the month. JP Morgan expects first half FY15 growth will be reliant on the fourth quarter of 2014 for growth, particularly in retail, which contributes around 20% of total advertising expenditure.

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Wages growth slowed sharply over FY14, with household average earnings just 1.5% higher year on year, the weakest growth since the late 1990s. This is well below the pace consistent with UBS' consumption forecast of 3% growth for 2015. While UBS acknowledges slower wages growth is good for company profits, it can also depress economy-wide demand, ultimately worsening both profitability and the ability to invest. In the broker's view it will boil down to inflation outcomes, and whether lower inflation is enough to deliver a boost to consumer spending and ultimately support profits and jobs.

UBS finds that companies with the greatest potential to benefit from slower wages growth are those in which the wages bill is a significant share of profits, but also where there has been less reduction in wages growth so far. These sectors include administration and support, manufacturing, accommodation, food and construction. The broker still expects real household disposable income to rise 2.5% over the coming year, helped by lower inflation and a pick-up in employment. Despite this, a further draw-down in household savings rates will be needed to meet the forecast of a 3% pace in consumption growth in 2015. At present, the broker concedes, the risk is for under achieving on that forecast.

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Snowy Hydro has purchased Lumo Energy for $605m. The acquisition includes around 540,000 customers, mainly in Victoria, as well as 163MW in diesel peaking plant in South Australia and Direct Connect, a customer acquisition channel. Deutsche Bank had anticipated Lumo Energy would be sold but both the value and acquirer were surprising. In the broker's view, the transaction metrics are supportive of an improving retail outlook and further vertical integration appears consistent with the recent report to the federal government recommending the privatisation of Snowy Hydro.

Deutsche Bank is adamant that irrational competition for market share by small players has blighted energy retailing and consolidation should improve sustainability. Given energy retailing is highly scalable, the industry has endured significant discounting in order for small players to obtain market share and this has increased churn and compressed margins. Consolidation is therefore considered a positive for the listed players such as AGL Energy (((AGK)) and Origin Energy ((ORG)).

The three government owners of Snowy Hydro, NSW, Victoria and the Commonwealth tried unsuccessfully to privatise the business in 2006. Deutsche Bank believes recent developments appear to support increased vertical integration as a way to privatisation. The deal makes sense to Citi too. The broker believes the price of Lumo Energy was too rich for most tier two players in the market, which lack sufficient balance sheet capacity, while the top two, AGL and Origin, were probably restricted by competition concerns.

Citi also notes Snowy Hydro has stated a desire to be the fourth pillar of competition in the market, which suggests a listing or sale to a new entrant is more likely than a sale to an existing player. The broker does not envisage a large change in the NSW or Victorian landscape until Snowy Hydro obtains base load generation, unless customer growth becomes a focus. However, the addition of peaking generation in South Australia could allow the company to compete harder for new customers.
 

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