Weekly Broker Wrap: NZ Banks, China’s Growth, Oz Insurers, Telcos and TV

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            [3] => ((IAG))
            [4] => ((QBE))
            [5] => ((SUN))
            [6] => ((SDF))
            [7] => ((IIN))
            [8] => ((TLS))
            [9] => ((TPM))
            [10] => ((NEC))
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            [2] => NAB
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            [4] => QBE
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            [7] => IIN
            [8] => TLS
            [9] => TPM
            [10] => NEC
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This story features ANZ GROUP HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: ANZ
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

-ANZ well placed in NZ market
-China expounds growth strategy
-Is Berkshire Hathaway a threat?
-MS considers TPG best value provider
-TV ad weakness structural & cyclical

By Eva Brocklehurst

NZ Banking

The outperformance of the NZ banking market is peaking. Credit Suisse has the impression that ANZ Bank‘s ((ANZ)) relative overweight positioning in New Zealand is now less of an advantage. The broker has found that while the dairy industry was able to cope with the income shock of lower milk solid pay-outs, there is acknowledgment among local bankers that some deterioration in agricultural portfolios is likely. Macro prudential controls are not expected to have a material impact on NZ subsidiary capital ratios.

Credit Suisse observed ANZ has revived itself in the NZ market and not only avoided customer attrition but actually built strength. Meanwhile, Commonwealth Bank‘s ((CBA)) ASB subsidiary has had its enviable leverage to the Auckland market reinforced, as this is set to remain the growth region in New Zealand in the long term. National Australia Bank‘s ((NAB)) BNZ appears to be addressing the areas where it has lagged peers, yet investment in franchise distribution and a re-entry to the mortgage broker market is viewed as adversely impacting on costs and margins in the near term.

Deutsche Bank also attended the NZ banker presentations. The broker expects slowing economic growth and challenges in the dairy industry will mean profit growth is reduced. Still, the industry is considered to be well insulated from competition, and rational. ANZ is believed to be the best placed to deliver earnings growth, with what Deutsche Bank describes as a nicely balanced portfolio throughout New Zealand. The broker notes cost control has been excellent across the sector. Nevertheless, it may be difficult to repeat the growth of recent years as bad debt normalisation creates a headwind and economic growth softens.

The importance of the Auckland market was reiterated, and success in this city that accounts for 40% of GDP is likely to define each bank’s performance in coming years. Deutsche Bank envisages a risk that ANZ knocks ASB off its pedestal while BNZ is seen working to address its underweight position.

China’s Steel Road

Although unlikely to affect 2015, Morgan Stanley ponders whether the Chinese government’s strategy, which aims to connect and integrate the Asia Pacific region and the route to Europe overland, will provide a new source of demand in coming years. The goal is to enhance regional trade, investment and infrastructure development. The broker notes, in meetings in China, involvement in the concept was a source of pride for many Chinese companies.

While there are more questions than answers at this stage, one of the critical issues is whether the strategy will increase steel demand, potentially offsetting current projections of negative steel production growth in China over the next three years. The strategy is entitled “One Belt One Road” which specifically refers to the ancient Silk Road which connects China with Europe. The term also includes the maritime “road” from China’s ports. Morgan Stanley believes the driver is Beijing’s efforts to ensure economic growth and employment continues during the current slowing of economic growth.

The likelihood is that some infrastructure enhancement is pulled forward in regions that have been earmarked to service this “road”, in Morgan Stanley’s view. These projects would then help reduce industrial over-capacity in China, effectively exporting capacity in order to maintain revenue. Moreover, around 30% of blast furnace capacity in China is not economically retrofitted to meet higher standards and is likely to be closed in coming decades. Hence the “road” is likely to offer the opportunity for such companies to “re-locate” capacity outside of China.

Insurers

The latest APRA data for the general insurance market signals continued market share contraction for Insurance Australia Group ((IAG)), QBE Insurance ((QBE)) and Suncorp ((SUN)). The challengers such as Youi continue to grow. Return on capital remains attractive for the challengers, despite lower relative profit, because of their product mix, which excludes the more capital-intensive statutory lines and long-tail commercial risks. Youi’s share of the addressable market is now 2.7% and Macquarie estimates this could rise to 4.0% within three years. Banks have also increased their share, with around 10% of the addressable market, expected to rise to 12% in three years.

Berkshire Hathaway is now operating in Australia with a local insurance licence. Macquarie suspects QBE Insurance is more exposed to the impact than IAG or Suncorp. The broker expects Berkshire Hathaway, which already underwrites risks for the Australasian market offshore, will have a greater impact on other international participants in Australasia, as their offerings are more comparable. QBE may be at risk by June 2016 for $20m in large corporate premiums in commercial lines, and up to $350-390m in retail premiums by June 2018, in the broker’s analysis.

Macquarie estimates around $200m in premiums for Australian risk will be underwritten by Berkshire Hathaway by June 2016. The intruder has teamed with Steadfast Direct and this is likely to affect Suncorp and Insurance Australia in as much as the new offering is competitive and Steadfast ((SDF)) wins new business. The broker does not expect the Oz insurers’ existing deals with Steadfast will be at risk from the tie in with Berkshire Hathaway.

Oz Telcos

Morgan Stanley has analysed recent price changes, which reveal a pause in competitive activity by the major telcos. Competition is still elevated but the largest change this month was from iiNet ((IIN)), which has included Fetch TV for free in bundled plans, effectively a $10/month reduction in price. Telstra ((TLS)) is now seen providing a viable competitive price in its Belong service. Still, Morgan Stanley considers TPG Telecom ((TPM)) the best provider of value in ADSL broadband and NBN, with its increasing vertical integration providing a sustainable cost advantage.

TV Advertising

The TV ad market is weak. Macquarie has pulled back forecasts for the June half to a contraction of 1.1% from growth of 2.0% previously forecast. This comes on the back of the downgrade by Nine Entertainment ((NEC)). This again raises the issue of whether the softness is structural or cyclical. The structural argument is supported by the rapid take up of streamed video-on-demand (SVoD) over the last few months as well as ongoing adoption of online video advertising.

The broker suspects the weakness is a combination of both structural and cyclical factors and finds it hard to be confident in a rebound in TV advertising against the softer momentum. At this stage, Macquarie limits reductions to industry growth rates for the current half alone and returns to a longer-term forecast for TV ad market growth of 1.0% in FY16.

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