Weekly Broker Wrap: Health Care, Banks, Online Mortgage Pricing And Over The Wire

This story features RAMSAY HEALTH CARE LIMITED, and other companies. For more info SHARE ANALYSIS: RHC

-Hospital usage, health cover lower
-Health insurance affordability at issue
-Bank funding costs appear manageable
-New tech finds tough going against banks
-OTW offers exposure to growing markets
 

By Eva Brocklehurst

Health Care

Private hospital benefits paid by insurers grew 5.0% in the December quarter, below the 7.0% and 10.5% growth experienced in FY15 and FY14 respectively. The percentage of Australians holding private hospital cover decreased to 47.2%, around 20 basis points below September 2015 levels.

Despite these figures, and six months of lower utilisation growth, Goldman Sachs is upbeat about the outlook for private hospital outlays. The broker expects Healthscope ((HSO)) and Ramsay Health Care ((RHC)) will take market share as they are adding capacity and projects in catchment areas with strong underlying demographics.

Looking into FY17, Goldman Sachs believes the key question for the insurers, Medibank Private ((MPL)) and nib Holdings ((NHF)), is whether they can sustain their margins at the near record first-half levels, or whether these gains are partially reinvested back into lower premium growth.

Macquarie observes hospitals claims growth has hit a 10-year low and most drivers of growth are moderating, other than population growth. The broker also believes the fall in the number of Australians with hospital cover is a further sign that insurance affordability is becoming problematic.

Although specific measures to address this are as yet to materialise, the broker envisages a risk to private hospitals, given these comprise the largest segment of insurer claims. Macquarie also suspects hospital industry growth will continue below historical levels.

Credit Suisse also notes the slowing in episodic growth in private hospital statistics. The reasons are not clear but the broker suspects it could be a combination of the cycling of strong comparables, capacity constraints, and exclusions in policies and higher excess levels resulting in the postponement of elective surgery.

Of more concern for the industry, Credit Suisse believes, are the high exit rates from private health insurance by both younger age groups and those aged 70 years and older. The risk is that another round of premium increases above the CPI could put further pressure on participation.

Banks

Concerns over bank funding and liquidity have lifted unnecessarily in recent weeks, Goldman Sachs observes. The broker cautions against reading too much into the shift in Certificates of Deposit (CDS) spreads, which has led to some concerns about a dramatic blow-out in funding costs.

The broker estimates the major banks' new issuance spreads have moved 20-30 basis points wider since late 2015, rather than the 50-60 basis points seen in CDS. Should this widening in new issuance spreads hold up, a small headwind is likely for margins.

The broker also finds no evidence of a cyclical lift in Reserve Bank exchange settlement account balances. With less reliance on wholesale funding, a lengthening in funding tenor and improved liquidity, the banking sector is now better able to navigate the short term credit market aberrations and while funding costs for banks have lifted, the increase is manageable to date, the broker maintains.

Online Mortgage Pricing

Google is discontinuing its US mortgage comparison website after only three months of operation. The exit is attributed to a lack of advertising revenue and Ord Minnett observes the largest financial services companies were unwilling to come on board.

While the broker still finds merit in new technology with brand affiliation looking to disrupt with price discovery, the failure of Google's venture does indicate the banks are negotiating from a strong position.

On the back of this development the broker notes that in Australia, the major banks have not signed up to Apple Pay, with negotiations on profit share ongoing. Additionally, in areas like consumer finance where disruptive technology has been stronger, banks have been successful in maintaining their presence.

Ord Minnett's analysts recently calculated that bank-backed firms have 62% share of the US$200m mobile US-peer-to-peer market.

Over the Wire

Over the Wire ((OTW)) is an Australian based provider of telecommunications and IT. The company listed late 2015 with a small free float of 10m shares. Most of the shares are owned by the vendors and Micro Equities believes this is the reason for a lack of coverage and attention from institutional and retail investors.

The company offers exposure to a number of growing markets, with a focus on the small-medium enterprise segment, and the broker forecasts FY16 earnings to grow 6.4% on pro forma FY15 earnings. The broker also maintains there is a lack of natural buyers for small companies in Over the Wire's markets which may provide some acquisition opportunities. Micro Equities initiates coverage with a Buy rating and price target of $1.41.
 

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