The Wrap: Building, Banks & Insurance

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This story features CSR LIMITED, and other companies.
For more info SHARE ANALYSIS: CSR

Weekly Broker Wrap: building materials; banks; general insurance; and online classifieds.

-Morgan Stanley suggests Aust residential building stocks warrant caution
-APRA proposals limit banks' ability to fund offshore subsidiaries
-Lack of profitability cited in ride-sharing and autonomous vehicle insurance
-New pricing for Macquarie Group's wealth platforms
-New pricing models for Seek and Domain Holdings
 

By Eva Brocklehurst

Building Materials

Morgan Stanley expects the largest decline in Australian residential construction will come in FY20 and a trough in activity occur in FY21. The broker continues to believe those stocks with exposure to Australian residential construction warrant caution. Dwelling commencements declined -20% in the June quarter and now sit at the lowest level since 2014.

Meanwhile, building approvals fell -23% in August and are now at the lowest level since 2013. The broker assesses declines are broad-based and across all states and dwelling types.

Morgan Stanley's materials intensity adjusted index signals that FY20 will prove to be a difficult year for materials providers. The broker suggests a recovery in building materials stocks is premature and reiterates an Underweight rating for CSR ((CSR)), the stock with the largest residential exposure under coverage.

The broker emphasises the importance of differentiating between house prices and new construction, noting that the stock has rallied around 15% since the Australian election result when sentiment around the housing market improved. This actually ignores the problems with demand and the earnings outlook going forward.

Weather conditions were generally favourable in Australia for building construction and improved in the US in the third quarter of 2019. Rainfall in four out of five Australian capital cities was below average levels in the third quarter. The broker assesses this should provide a favourable volume backdrop for building materials stocks.

In the US, the improvement was most evident in Texas, particularly relative to an exceptionally wet prior corresponding period. This should provide a solid earnings base for Boral ((BLD)), in the broker's opinion. James Hardie ((JHX)) is also expected to deliver a more favourable comparable in its second quarter report, due November 6.

Banks

Macquarie estimates a $4-5bn capital shortfall across ANZ Bank ((ANZ)), National Australia Bank ((NAB)) and Westpac ((WBC)) following the new APS 111 proposal from APRA (Australian Prudential Regulatory Authority), which seeks to adjust the banks' ability to fund NZ subsidiaries.

The impost for these three banks is worse than Macquarie previously expected, while for Commonwealth Bank ((CBA)) the reverse is the case. As a result, Macquarie expects Commonwealth Bank will be in a position to return capital to shareholders while the others will need to increase capital.

APRA has proposed limiting the favourable capital treatment for offshore subsidiaries to 10% of CET1. The proposal creates a lack of capital-related economies of scale for institutions that are overweight operations in offshore markets.

Macquarie expects ANZ Bank, in particular, will look to scale down New Zealand operations to minimise the potential impost stemming from regulatory changes. However, full NZ divestments are now considered less likely.

The broker also envisages a risk the Reserve Bank of New Zealand will stick to its original plan and lift capital ratios to 16% without offering much in the form of concessions.

Bank Previews

As the reporting season for the banks approaches, Credit Suisse believes outlook commentary will be crucial, considering the recent reductions to official cash rates and the pricing actions undertaken since the last reporting season.

Any commentary around a pick-up in mortgage lending and overall asset growth is likely to be well received. For ANZ Bank, progress on costs will be key, while the broker suspects the market is anticipating an upgrade to guidance at Macquarie Group ((MQG)).

Recent US bank results have shown positive momentum in comparable business lines with investment banking revenue beating expectations, an indicator for Macquarie Group.

Meanwhile, share price reaction at Westpac will be all about whether suspicions over capital, dividend and costs are confirmed and uncertainties removed. No change to guidance is expected at National Australia Bank, although the Credit Suisse suspects it may partially underwrite its dividend reinvestment plan again.

General Insurance

The first major casualty of ride-sharing insurance has been revealed, as the largest provider of insurance to US Uber drivers recently ended the partnership because of lack of profitability. Macquarie notes, after more than five years, the global insurance industry is unable to generate underwriting profits from new products for the shared economy and cannot justify autonomous vehicles.

James River Group will exit the US relationship with Uber, strengthening its capital reserve. Macquarie suggests 45% of Australian insurance industry profits pertain to motor insurance and concludes that those with lean cost bases, nimble technology and diversified portfolios will be best placed to provide local offerings for ride-sharing customers.

The broker notes QBE Insurance ((QBE)) was the first to offer insurance for Tesla in Australia but this relationship ended after 12 months, as the high cost for parts for autonomous technology made the proposition unaffordable. The broker concludes that the global insurance market remains a long way from finding an economic solution.

Wealth Platforms

Macquarie Group has announced new pricing for platforms, consistent with Citi's view that the industry will continue to come under pressure as incumbent providers use price to arrest market share losses to specialists.

The broker's analysis of Macquarie Group's new pricing indicates it is generally more expensive than BT Panorama from an administrative fee perspective. The broker does not expect the price reduction to materially affect Netwealth ((NWL)) and HUB24 ((HUB)) for large wholesale deals, although it does make Macquarie Group more competitive. Citi also expects downside risks to overall industry pricing, particularly as cash rates head lower.

Online

Both Seek ((SEK)) and Domain Holdings ((DHG)) have shifted to new pricing models. Rather than charging a flat price per classic advertisement, Seek will vary its pricing based on candidate scarcity and location. Customers will now commit to dollar expenditure levels usable across multiple advertising types.

Discounts will no longer be based on volume but based on total expenditure. UBS assesses this will have the greatest impact on recruitment agencies. The short term impacts are likely to be minor and are already factored into FY20 guidance. The broker expects yield uplifts will be felt primarily from the second half of FY21.

UBS understands Domain is also in discussions with agents on a new pricing model more closely aligned with underlying property values. Going forward, the company may vary pricing depending on a particular zone. Anecdotal feedback indicates this should have the effect of lifting average prices paid to Domain. The broker suspects the new pricing will be another mechanism to help the company achieve its targeted yield growth.

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