The Wrap: Regional Banks & Financial Advice

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Credit rating downgrades for regional banks; trends in financial advice; almonds pricing; and Canaccord Genuity initiates on Visioneering.

-Impact of S&P downgrade expected to be greater for Bank of Queensland
-Trend against large incumbents in the financial advice sector
-Industry funds making gains ahead of others in the superannuation sector
-Downward pressure on almond prices expected as California's drought ends
 

By Eva Brocklehurst

Regional Banks

Standard & Poor's has announced a number of Australian bank rating changes after a review of increased system risks associated with strong growth in private sector debt and house prices. Credit ratings for the major banks as well as Suncorp ((SUN)) and Macquarie Group ((MQG)) were unchanged. Bendigo & Adelaide ((BEN)) and Bank of Queensland ((BOQ)) were downgraded one notch to BBB-plus.

Goldman Sachs observes the downgrades appear to be a function of the lack of any perceived government or parental support rather than a reflection of the relative risk profiles of the banks. The broker suspects the credit rating downgrade may increase the cost of term wholesale funding for both regional banks by around 10 basis points. This may be the worst case scenario, Goldman Sachs acknowledges, as some domestic money managers may not necessarily rely on S&P credit ratings as much as global money managers do.

Bell Potter agrees the impact is likely to mean an increase to wholesale funding costs of 10-15 basis points and, all else being equal, the impact for Bank of Queensland's bottom line will be greater because of a higher reliance on wholesale funding. The broker does not expect Bendigo & Adelaide to increase its home loan rates to offset the loss in net interest margin, being a community-oriented bank.

On the other hand, Bank of Queensland is expected to partly increase home loan rates as it is more of a specialist finance company. Bell Potter believes Suncorp's banking division is the clear winner in the Australian banking space and retains a bullish view on the stock given its stable asset quality and margin upside from home loan re-pricing.

Financial Advisors

Bell Potter explores trends in the financial advisor sector and notes the unaligned larger independent operators and small self-licensee groups are winning the battle against the large incumbents. The broker forecasts the Australian superannuation system will reach $3 trillion by June 2020 and growth is underpinned by net contributions of about $40-50bn a year, as well as income from investments and capital growth.

While clear winners in the battle for superannuation funds include self managed super funds (SMSF) and industry funds sectors, more recently the SMSF sector has flat-lined and industry funds appear to be making gains at the expense of every other category.

The four listed stocks that are affected most by the trend to independence include AMP ((AMP)), for which the broker has a Sell recommendation and $3.98 target. Bell Potter assesses AMP is losing out in the move to independence and with retail and corporate super losing to SMSF and industry funds.

IOOF Holdings ((IFL)) appears to be bucking the trend, the broker observes, growing its market share in the last six months to 4.0%. Growth is helped by the addition of a net 50 advisers to the company which is expected to be completed by June this year. Bell Potter has a Buy rating and $9.30 target.

Onevue Holdings ((OVH)) and Praemium ((PPS)) are also beneficiaries of the shift to independence through their investment platforms. Both stocks have a Buy recommendations and 98c and 77c targets respectively.

Almonds

Moelis observes almond growing conditions in the state of California have improved markedly in the last six months and this supports the upcoming harvest. The 2017 almond acreage is expected to reach 1m, up 6.4% on 2016. California supplies over 80% of global almond production. As supply increases, combined with elevated purchasing costs from key international markets, the broker believes there will be continued downward pressure on almond pricing.

The California drought is over, with only 8.2% of the state still in drought compared with 75.3% back in November. Abundant water is now available as reservoir catchments are near capacity. The additional supply that has come to market has meant pricing has pulled back to around US$2.60/lb. Another driver of the decline in prices been the purchasing power of key international markets.

With the appreciation of the US dollar against a majority of global currencies the cost of almonds for key international buyers such as Spain, China, India and Germany has almost doubled. Reflecting the situation, Moelis maintains a Hold rating for Select Harvests ((SHV)) and a target of $5.42.

Visioneering Technologies

Visioneering Technologies ((VTI)) listed in March on the ASX. The company, based in Atlanta Georgia, has developed a new contact lens called NaturalVue with a unique proprietary design making it ideal for vision correction in people as they get older and start to lose near vision and potentially slowing the rate at which a child's shortsightedness gets worse.

All four major contact lens companies offer multifocal contact lenses but these are based on a design which typically is unable to simultaneously provide high-quality near and far vision. The NaturalVue lens eliminates one of the key physiological signals that has been shown to stimulate the eye and result in worsening myopia. Initial data from children using the lens has been encouraging and suggests these lenses can have a dramatic impact on the progression of myopia.

Canaccord Genuity believes strong interest in the product during the pilot launch suggests robust sales growth ahead. The broker also believes there are significant markets for the lenses outside the US and this is not yet factored into forecasts or valuation. The broker initiates coverage with a Buy rating and $0.65 target.

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