Tag Archives: Banks

article 3 months old

Weekly Broker Wrap: Hospitals, Insurers, Banks, Building Materials And Temple & Webster

-Caution urged on hospital sector
-Domestic insurer P/E discounts unjustified?
-Domestic bank provisioning on oil too low?
-Low oil prices support building products
-With most benefit attributed to Boral
-Temple & Webster well placed to grow
 

By Eva Brocklehurst

Hospitals

Utilisation has been the main driver of growth in the hospital industry, with Macquarie's analysis signalling the amount of hospital care per person received since 2005 has increased 41%, for those with insurance. Contrary to popular belief, the analysis points to ageing as only a small factor in this.

Are we receiving too much health care? The broker asks the question, given the federal government has initiated a review of the Medical Benefits Scheme fee schedule with a goal to link reimbursement to good clinical practice. Uncertainty exists as to the impact on the industry but Macquarie suspects it could be material and there is little appreciation of the current risk.

Hence, the broker urges caution on the sector until clarity is obtained. Macquarie prefers Healthscope ((HSO)) over Ramsay Health Care ((RHC)) based on valuation, given a larger brownfield pipeline and less exposure to France.

Insurers

Softer premium rates flowed through to margin pressure in 2015 and investor expectations were lowered considerably for 2016. Nevertheless, Credit Suisse observes early signs of a recovery in premium rates. The broker believes a large price/earnings (P/E) discount is no longer justified for domestic insurers Suncorp ((SUN)) and Insurance Australia Group ((IAG)).

IAG offers earnings upside in the broker's opinion, and the potential for a capital return in coming years, while Suncorp offers valuation support and an earnings recovery, albeit delayed versus IAG.

QBE Insurance ((QBE)) enters 2016 with commercial line premium rates softening globally and the broker envisages downside risk to gross written premium, which will continue to pressure margins. From a low base, nonetheless, it offers dividend support as its equity raisings are near an end.

Morgan Stanley considers QBE has the greatest risk/reward outlook, offering the best earnings growth and an undemanding valuation, while IAG struggles for growth but offers resilience and potential P/E expansion. In terms of Suncorp, the broker believes downside earnings risk and weak franchise momentum overhangs the stock and it remains too early to become a buyer.

Banks & Oil

Major banks have around $31bn exposure to the oil & gas industry, Morgan Stanley contends and provisions appear low versus the levels reported by US banks, although the broker acknowledges the nature of the exposures is quite different.

Commonwealth Bank ((CBA)) and ANZ Banking Group ((ANZ)) are the most exposed of the four major banks. The broker's US analysts note Wells Fargo reports energy reserve ratios of 7.0% and energy provision levels are building.

In contrast, none of Australia’s major banks have disclosed stressed exposure or provisioning levels in their oil & gas portfolio. The broker doubts provisioning levels on the mining books would be much above 1.0%. At the very least, Morgan Stanley expects the decline in the oil price will lead to pockets of weakness and higher-than-expected loan losses in FY16.

Building Materials

Credit Suisse looks at the implications of a low oil price environment on the building sector. The two most exposed stocks are Boral ((BLD)) and James Hardie ((JHX)). The broker concludes the current oil price environment is positive for the former and net negative for the latter.

Lower diesel fuel costs which directly reduce costs associated with concrete, asphalt and quarry trucking benefit Boral and, in addition, this should flow through to freight rates for other building products.

The lower cost of gas should also help with the manufacture of James Hardie's key product, fibre cement. The negatives for James Hardie lie in the sharp drop in oil sector employment in the US states of Texas and Oklahoma, key home building markets for the company.

UBS notes US housing is growing at a steady pace, even in Texas, and a lower Australian dollar traditionally favours building materials companies so, while the housing downturn will hurt this is not a typical cycle and companies are well prepared.

The broker finds CSR ((CSR)) significantly exposed to a housing downturn amid ongoing concerns over the future of the Tomago aluminium smelter. UBS highlights news that Fletcher Building ((FBU)) is close to acquiring the Higgins group in New Zealand, which will increase its exposure to construction contracting and mark its entry into asphalt and road surfacing.

Boral's progress in the US, and any comments around cement and concrete pricing, is expected to drive sentiment during reporting season and UBS still believes the stock provides the best overall risk/return investment proposition on a three-year view.

The broker has recently upgraded James Hardie to Neutral from Sell, as the price versus growth trade off appears more reasonable. Reporting season for Adelaide Brighton ((ABC)) is expected to be steady as she goes, with UBS not envisaging much new investment opportunity.

Temple & Webster

Temple & Webster ((TPW)) is Australia’s largest online specialist in furniture and homewares, operating three e-commerce platforms which attracted a combined audience of 12.6m visitors over the year to June 30. Bell Potter has initiated coverage of the stock with a Speculative Buy rating and $1.30 target.

The broker's positive view is predicated on the large growth potential for online penetration of the segment, with the company having a strong competitive position and multiple growth avenues, as well as a data-driven advantage.

The sites' categories have a relatively low level of branded goods and a wide range of unique products which reduce the tendency of consumers to check around for prices, Bell Potter maintains.

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article 3 months old

Macquarie Group: Approaching Long Term Entry Point

19/1:
DailyTrend: Down
Weekly Trend: Down
Monthly Trend: Down
Support levels: $69.49 / $62.70 / $59.68
Resistance levels: $86.72

Technical Discussion
Macquarie Group is a leading provider of banking, financial, advisory, investment and funds management services.  It operates as a non-operating holding company (NOHC).  The company’s products and services include asset and wealth management which is engaged in the distribution and manufacture of funds management products. In June 2014 Charter Hall Group announced that Macquarie was no longer the substantial holder of the Company. For the year ending the 31st of March 2015 interest income increased 9% to A$5.01B. Net interest income after loan loss provision increased 13% to A$1.73B. Net income applicable to shareholders increased 28% to A$1.5B.  Broker / Analyst consensus is currently “Buy”.  The dividend is presently 4.6%.
 
Reasons to remain bullish longer term (downside expected short term):
→ The recent acquisition of an aircraft leasing portfolio is positive for future earnings.
→ The trading range has been penetrated.
→ FY 15 guidance has been revised higher.
→ Almost 30.0% growth in advisory revenues is anticipated in the first half.
→ Capital market trends are improving and figures suggests MQG is set for its strongest half in three years.
→ Recent results were robust helped by favorable conditions in energy markets.
→ The pay-out ratio over the past five years has been at or above guidance. 

The patterns were looking good for MQG during our last review with the ideal situation being to see a continuation down toward the lows made in August of last year.  Those lower levels haven’t quite been tagged though we are now within a whisker of doing just that.  The perfect scenario regarding the patterns is to see a regular flat correction which would be a bullish proposition should it prove to be the correction of choice.  Macquarie has been a stellar performer off the 2011 lows where price was sitting at a lowly $19.60 which just emphasises the potency of the prior uptrend.  It also puts the recent sideways meander into perspective which in essence is being viewed as a bullish proposition.  First of all though we need to see slightly lower levels tagged before our wanted leg higher kicks into gear.  Looking at the weekly chart (not shown) shows that price could theoretically head down to the 1.618 projection of wave-A sitting at $59.68 and still be in a position to rally hard although a decline to those levels isn’t our highest expectation at this juncture.  However, it is a level to keep a close eye on if the current broader market weakness continues.  Analysts continue to like this company with some of the details stated above.  Let’s also not forget the dividend yield which is edging toward the 5% region which investors will no doubt be watching closely.

Trading Strategy
If you like the look of the company fundamentally then a buying opportunity could be close by.  A rotation down toward the lows of wave-A over the next few days needs to be followed by immediate strength to lock in the aforementioned regular flat pattern.  A push straight down through the lows of wave-A means a little more time is going to be required as price will then likely head down toward the 1.618% projection just beneath $60.00. This would also result in price heading back into the zone of support.  Again, this will be viewed as a potential buying opportunity following signs of demand.


 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

Weekly Broker Wrap: SMSFs, Franking, Building Materials, Bank Capital, Wealth And Utilities

-Self managed super growing strongly
-James Hardie constrained by Texas
-Boral supported by Oz infrastructure
-Revised Basel rules but uncertainty prevails
-Fund flow growth slows but still healthy
-Policy uncertainty a headwind for utilities
 

By Eva Brocklehurst

Self Managed Super Funds

Self Managed Super Funds, or “selfies”, have had a torrid time this year, Credit Suisse maintains. They are on track to record capital losses for the third quarter in a row. As a consequence, selfies as a proportion of the $2 trillion Australian pension pool are reducing.

While there were comparable dollar losses in the rest of the superannuation fund segment these were smaller as a proportion of total assets. Allocations to Australian equities by selfies have fallen to 39% of current portfolios from 41% a year ago.

Despite this fact, the broker notes they remain the most important pension investor in Australian equities, owning 16% of the market versus 11% for retail funds and 7.0% for industry funds. Importantly, selfies are growing in numbers as members roll over funds from other superannuation vehicles.

The broker observes this will continue as the country's pension scheme ages and selfies will underpin the dividend trade in Australia. They are committing more new money to Aussie equities than any other group and the segment is winning new members at the expense of the rest of superannuation industry.

Their second biggest asset is Australian cash at 27% of assets under management and the third is Australian property, at 25%. Credit Suisse estimates their property positions have increased by two percentage points over the past 12 months.

Franking

Macquarie has analysed its data and research on franking, comparing companies against sector peers and looking at franking credits as a percentage of market capitalisation. Fortescue Metals ((FMG)) has moved into the top five in terms of the highest franking credit balances while Commonwealth Bank ((CBA)) has fallen in rank, albeit still increasing its franking balance to $569m this year from $533m last year.

In the lowest value end of the scale, Village Roadshow ((VRL)) has moved into the bottom five while Aurizon ((AZJ)) has come out. Aurizon's franking balance has moved from negative to $76m.

Macquarie also notes Harvey Norman ((HVN)) continues to have a high franking account balance compared with other companies in the ASX100, although its balance has dropped in 2015 to $584m from $659m. Fairfax Media ((FXJ)) has a comparatively low franking balance which has gone backward since 2013 when compared with other stocks in the ASX100.

Building Materials

Credit Suisse has surveyed US real estate agents and notes their concerns around the shortage of quality homes amid buyer resistance to higher prices. Home buyers constrained by job security were sharply in evidence in Texas, while several markets noted a material slowing in foreign buyers, which has taken the heat out of the market.

The broker believes this warrants caution around the broader housing market as the slower winter months get under way. This could be aggravated by affordability issues following recent increases in mortgage rates.

Texas accounts for around 25% of James Hardie's ((JHX)) total US fibre cement volume and is also one of the company's more profitable regions. James Hardie is also is overweight in the city of Houston, where activity according to the survey fell to its lowest level since the global financial crisis.

Credit Suisse expects the stock to be range bound until the secular growth story is restored. The company is also further impaired by a capital management story that has largely played out.

The broker estimates 20-25% of Boral's ((BLD)) US revenue is derived from Texas, accounting for 2-3% of the group. Still, a number of catalysts should support the company's earnings, with the broker anticipating the emerging Australian east coast infrastructure cycle.

Bank Capital

The latest Basel revisions to bank capital rules appears to be softening relative to last December's proposal, Macquarie observes. Uncertainty surrounding implementation and interpretation continues but the broker suspects risk weighting on standardised mortgages is likely to be lower than previously expected.

The broker also observes that while banks took the opportunity to raise pricing on investor portfolios relative to the owner occupier part of their book, the capital backing for these exposures has not materially changed.

Assuming regional banks are able to continue to utilise the lender mortgage interest capital offsets, Macquarie considers the revisions are a better-than-expected outcome for the regional banks. The broker continues to envisage upside risk to bank valuations as the sector yield gap to the industrials narrows.

JP Morgan considers the revised proposals maintain the pressure on the major banks to progressively build capital over coming years. The broker observes some headwinds across the corporate and credit card book but the biggest unknown is with mortgages.

Significantly higher risk weights for investor mortgages should be a key swing factor that the broker believes is open to interpretation on the basis of whether loan servicing is materially dependent on rental income.

The broker envisages overall risk weights across the regional bank portfolios as unchanged, with higher investor risk weights offset by lower owner occupied risk weighs for higher loan-to-valuation ratio mortgages.

The risk weight floor for advanced accredited banks for investor mortgages still largely remains an academic exercise, in the broker’s view. JP Morgan works with an assumption of an 80% floor.

Wealth Manager Retail FUM

Statistics from the September quarter indicate that weaker markets are affecting investor appetite, although UBS observes net inflows to wealth manager retail funds remain at quite healthy levels.

Flows have now remained at around $20bn for nearly two years and, as a consequence, growth from flows into funds under management (FUM) has declined to 3.1% from 3.8% over this period.

This level of flow was not sufficient to offset the impact of equity market declines, which reduced FUM by 2.0% in the quarter. While not the best quarter for AMP ((AMP)) the stock remains the broker's preference as a defensive wealth manager, versus pure-play fund managers such as BT Asset Management ((BTT)), as it is considered to have more leverage to reduced investor flows and markets.

Utilities

Morgan Stanley believes the climate agreement in Paris has a low immediate impact on Australian utilities because the agreement was well flagged by the US and Chinese delegations, and because implementation in Australia will only follow in 2020.

The broker expects Australia's emissions reduction will require an evolving of the government Renewable Energy Target (to be reviewed in 2020) and its Direct Action plan. In the meantime, uncertainty in emissions reduction policy will be a sector headwind, in Morgan Stanley's view, as it hampers capex planning for the utilities under coverage. This contributes to a Cautious industry view.

DUET's ((DUE)) Energy Developments business is a beneficiary because its revenue and development prospects rely, in part, on emissions reduction policies. The broker's base case is a modest carbon price from the early 2020's, continued deployment of both large and small scale renewables and an orderly shift in the mix of coal-to-gas-to-renewables in thermal generation and oil-to-electricity in transportation.
 

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article 3 months old

Ongoing Margin Pressure For Suncorp?

-New CEO likely to take more conservative stance
-Question of which issues are unique to SUN
-Long-term margin target considered a stretch
 

By Eva Brocklehurst

Suspicions that FY16 might turn out to be challenging for Suncorp have been acknowledged, with the company downgrading its underlying insurance margin to 10% for the first half, after realising 14.7% in FY15.

The reduction in margin comes through rising claims inflation and a lower Australian dollar but the company has retained a commitment to “meet or beat 12% through the cycle”.

Suncorp did not detail the extent of the factors that were impacting earnings and, Credit Suisse notes, also hesitated to put a timeline on any recovery in the margin. The main drivers appear to be claims related concerns in home, motor, compulsory third party (CTP) and commercial lines.

Citi suspects the downgrade was partly because a new CEO typically re-sets expectations lower, and it remains to be seen just how much of this particular re-set is a one-off occurrence, or uniquely Suncorp's problem.

Most brokers remain cautious about the outlook, as evidenced by six Hold ratings on FNArena's database, with one Buy (Macquarie) and one Sell (Morgan Stanley). The consensus target is $12.71, which suggests 10.9% upside to the last share price. This compares with $13.72 ahead of the announcement. The dividend yield on FY16 and FY17 forecasts is 6.6% and 7.0% respectively.

There remains a case to be cautious about general insurance earnings, overall, Credit Suisse contends, with commercial premium rates continuing to decline and personal lines also coming off a year of premium rate reductions. The broker suspects Suncorp is catching up on industry issues surrounding CTP (green slips) and claims inflation.

Credit Suisse does not believe a 10% margin is the new norm but neither does it believe exceeding 12% is highly probable. Earnings estimates are lowered as is the forecast pay-out ratio, while the broker removes a special dividend – previously 12c – from FY16 forecasts.

Morgan Stanley reduces its pay-out ratio forecast to 65% but retains a 10c special dividend estimate for FY16, for now. The broker considers the 12%-or-more margin expectations are “aspirational”, observing industry feedback does not reconcile with Suncorp's performance in CTP, which puts the sustainability of super-normal reserve releases at risk.

Over-reliance on reserve releases to drive reported margin upside and support the dividend requires a price/earnings discount, the broker maintains. Morgan Stanley highlights other risks, including further falls in the Australian dollar, a normal summer catastrophe season accentuating home inflation, and losing volumes on personal insurance.

All up, the broker suspects the franchise risks are elevated. Peers that do not face similar inflationary pressure are likely to win more volume. Also, as the company nears the end of its efficiency drive, Morgan Stanley questions whether a lowest-cost manufacturer, price-led, multi-brand growth strategy is obtaining the necessary results. Optimising a vertically integrated model demands higher volumes and the broker retains an Underperform rating.

Macquarie is less worked up about the downgrade, although acknowledges the industry environment is very competitive, expecting some pricing and claims initiatives may moderate the impact on margins in the second half. The broker notes all industry participants are expecting flat or modest premium growth and commercial insurances rates remain negative.

Also, while claims on the home front have a unique frequency when it comes to Suncorp, the size of these claims reflects those of most peers. Suncorp appears to be suffering from a greater currency impact, Macquarie observes, compared with its competitors, and large commercial losses have impacted its book more so than for peers. The broker sticks with an Outperform rating.

A significant margin reduction was always highly likely, in JP Morgan's view, with the new CEO expected to take a more conservative stance. The broker had previously flagged significant differences in Suncorp's CTP classes, noting its more optimistic assumptions at a time when the industry was signalling a worsening trend. Still, the extent of the downgrade is a surprise, and the trends in Suncorp's motor and home segments appear to JP Morgan to be worse than the broader industry.

Premium rate increases are expected to come through and offset the inflation trends and this should be positive for the margin outlook. At the current price the stock offers the most upside among the broker's coverage of general insurers, but the difficulty is in establishing the underpinnings of the margin downgrades and whether these are likely to continue.

The downgrade is appropriate, rather than conservative, in Deutsche Bank's view, and restoring the margin to 12% appears a stretch in the current environment. The broker reduces its long-term underlying margin forecast to 11% and, with few positive catalysts ahead, retains a Hold rating.

UBS, too, remains cautious and suspects a further recalibrating of targets, capital strategy and growth appetite is likely from the new CEO over the next six months. With a lack of clarity around the second half, the broker is reluctant to factor in margins approaching the 12% target.
 

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article 3 months old

Goodbye Clydesdale, Dividend Now The Issue For NAB

-NAB facing margin pressure
-Capital ratio still modest
-Dividend pay-out may be a stretch
 

By Eva Brocklehurst

National Australia Bank ((NAB)) has pushed ahead hard with its plans to return to native soil, outlining the process by which it will offload its troubled UK asset, Clydesdale Bank. Brokers are now intent on seeking out what this means for NAB's future dividend sustainability.

The bank has published documents detailing the de-merging and listing Clydesdale Bank in the UK. NAB is offering 75% of Clydesdale to shareholders at a ratio of 1-for-4 and this stock will have a primary listing on the London Stock Exchange and a secondary listing on ASX.

NAB also proposes to sell up to 25% through an initial public offer (IPO) to institutional investors which would be listed on the London Stock Exchange. The proceeds of this IPO will be retained by NAB to strengthen its capital position.

The de-merger is expected to be implemented by February 8, 2016. Then, NAB will have left its UK play entirely. NAB shareholders will retain the same holding in the local entity as before but also hold new securities, which represent 75% of their previous indirect interest in Clydesdale. They will be able to liquidate their Clydesdale holdings subsequently and allow new investors to take over the charge.

Citi believes the financial metrics of the proposition are weak as Clydesdale is being divested below book value. The remaining capital ratio for NAB, at 8.95%, is also considered too modest and the broker suspects there will be pressure on NAB's dividends.

The management of Clydesdale is indeed optimistic, UBS contends, perhaps too optimistic in targeting a more than tripling of pre-tax profit by 2020. Still, NAB can now focus solely to Australasian operations. UBS believes the bank is well placed to gain locally from an acceleration in business credit growth but faces margin pressure in re-engaging with customers.

This difficulty offsets the expansion in mortgage interest margins and limits the earnings recovery, in the broker's view. NAB will also need bad debt charges to remain around current low levels in order to keep its dividend intact post the de-merger, the broker suspects.

Deutsche Bank also considers the financial targets for Clydesdale ambitious but the sale should allow NAB to redouble its efforts at the local level. The broker suspects Clydesdale's cost/income ratio of 75% will be challenging to achieve.

NAB's pro-forma returns should rise to a relatively healthy 14.6% post the de-merger but there are still areas of concern for Deutsche Bank. The main issue is the business banking margin and elevated pro-forma pay-out ratio of 77%, which appears a stretch given further capital demands are likely.

Deutsche Bank uses a FY16 price/earnings ratio of 11.5 to value the Australian business, based on a 10% discount to Westpac's ((WBC)) ratio. This valuation discount has increased which reflects NAB's weak second half result and margin headwinds.

De-merger assumptions, while generous, are realistic in Credit Suisse's opinion. Still, it is an expensive transaction to execute, with all up costs for NAB approaching $500m. NAB has confirmed it will enter an underwriting agreement prior to the announcement of the IPO price, which should enable protection of its own capital position, and that pleases the broker.

The issue of dividend sustainability is raised, nonetheless. Credit Suisse believes dividend can be sustained but there is further pressure on capital dynamics with this de-merger. More pressure is also expected to emerge following completion of the life insurance divestment.

The broker values NAB as fully mature restructuring story with some earnings headwinds, assessing it to be the most vulnerable of the big four in relation to dividend sustainability. Credit Suisse prefers the Australian mortgage oriented major banks for customer re-pricing leverage.

FNArena's database has six Hold ratings for NAB and one Buy (Macquarie). The consensus target is $33.03, signalling 13.6% upside to the last share price. Targets range from $30.10 (Morgan Stanley) to $37.84 (Macquarie). The dividend yield on FY16 and FY17 forecasts is 6.8% and 6.9% respectively.
 

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article 3 months old

Bank Outlook Solid But Can Yields Be Sustained?

-Healthy dividends but will they hold up?
-Foreign bank commercial expansion
-APRA revisions support regionals

By Eva Brocklehurst

Mortgage re-pricing has revitalised interest in the banking sector in recent months and the sector's strong dividend yields are hard to ignore. Meanwhile, the latest data suggests business credit growth is accelerating and diversifying.

Macquarie believes elevated pay-out ratios are likely to be sustained in an environment of low credit growth and benign credit quality. While ANZ Bank ((ANZ)) offers the highest yield in the sector, albeit with an associated level of near-term earnings risk, Macquarie prefers Westpac ((WBC)), which offers a sustainable dividend yield of 6.0%.

The near-term outlook for the major banks, in the broker's view, is underpinned by a diminished risk of capital raisings in FY16 - which had undermined share prices recently - and supportive revenue trends.

Outside of a substantial deterioration in the credit cycle, Macquarie expects the banks to maintain current dividends despite the fact capital requirements will become more stringent.

Goldman Sachs is cautious about becoming too optimistic about the margin outlook on the back of mortgage re-pricing alone. The broker currently estimate the sector's net interest margin will improve by one basis point in FY16, implying that less than 20% of mortgage re-pricing will be accretive to headline margin. Goldman Sachs also expects deposit pressure to accelerate as cash rates remain lower for longer.

Commonwealth Bank ((CBA)) is considered the most exposed to margin headwinds over FY16, in the broker's view, with National Australia Bank ((NAB)) the least exposed. CBA has also the largest relatively exposure to term deposits. The broker calculates that every 25 basis point decline in term deposit spreads reduces its FY16 margin by around five basis points. The broker's preference is for ANZ, given the upside to its target price.

Morgan Stanley expects the major banks will try to hold the level of their dividends. Still, the differential between the yields of the individual banks has expanded recently, reflecting investor concerns about the risk of cuts to dividends.

The broker argues that ANZ and NAB have less margin for error than the other two majors and rising loan losses against a backdrop of higher capital intensity could trigger a review of dividends in 2016.

The broker suspects the downside risks from these two factors, and an increasing probability that dividends are reduced, more than offsets any benefits of home loan re-pricing. Morgan Stanley retains a relatively negative stance on the banks

The broker has Equal-weight ratings for Westpac, CBA and NAB and an Underweight rating for ANZ. Bank of Queensland ((BOQ)) remains the broker's preferred Australian bank exposure (Overweight), because of an above-peer earnings and dividend growth profile.

UBS observes there is positive momentum in services, transport & storage and retail & wholesale business credit. Growth is also spreading down to small to medium sized enterprises. This pick-up is positive for the banks although the broker acknowledges the data runs contrary to a recent deterioration in capex numbers.

If business credit continues to expand it should support sector revenue, which at 6.0% is the fastest rate of growth since the financial crisis. It also helps offset normalising bad debts and higher share count, UBS maintains.

The broker suspects housing credit growth has peaked at 7.5% and this should ease back to 4.6% in 2016 and 3.4% in 2017. Meanwhile, personal unsecured credit continues to be flat.

Where do the major banks fit in this scenario? UBS observes housing strength continues for ANZ while Westpac has also picked up business. NAB's housing performance appears to have stalled.

Credit Suisse believes housing and business credit growth rates are converging, with business accelerating, albeit unevenly, and investor housing credit growth decelerating. However, what has piqued the broker's interest this month is corporate lending by foreign-owned banks. Market share appears to be on the rise.

Non-Asian foreign banks appear to be driving the trend in foreign bank corporate lending, Credit Suisse observes, with Citi's percentage up to 1.12% from 0.44% and Bank of America to 0.54% from 0.42%.

Asian banks have expanded lending rapidly into the commercial segment of residential and land development. Bank of China has increased its market share to 1.88% in October from 1.55% a year ago. China Construction Bank has increased its share to 0.37% from 0.20% and Mizuho to 1.28% from 1.03% in the same period. DBS now has a market share of 0.07% from virtually nothing a year ago.

The Australian Prudential Regulation Authority (APRA) has published discussion paper on the proposed revisions to its prudential framework for securitisation. One feature, Deutsche Bank notes, is APRA now intends to dispense with a credit risk retention requirement.

This removes a potential downside risk for regional banks, which are heavy issuers of RMBS (residential mortgage-backed securities), as it will allow smaller operators to continue using this capital-efficient funding mechanism.

Currently, APRA permits capital relief for banks issuing RMBS if they sell all tranches, both senior and subordinated. It had proposed deposit taking institutions retain at least 20% of the credit risk of the junior or subordinated class.

The broker believes APRA is taking seriously the recommendations of the Financial System Inquiry relating to competitive dynamics in the banking market. Regional banks are large users of securitisation, accounting for 11% of Bank of Queensland's total funding and 8.0% of Bendigo & Adelaide Bank's ((BEN)). This compares with the major banks usage at around 2.0%.
 

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article 3 months old

Treasure Chest: Big Four Banks At Risk Of Further Capital Raising

By Greg Peel

FNArena’s recent bank sector update, Beyond Reporting Season, outlined the various issues weighing on Australia’s Big Four as three begin FY16 and Commonwealth Bank ((CBA)) heads into its second quarter. The two primary issues to consider are ongoing, and as yet uncertain, regulatory tightening and, or on top of, earnings trajectories at risk of being very subdued.

Welcome to the post-GFC world, which for Australia’s banks is all rather new and all very strange.

We recall that in 2008-09, in response to the fall of Lehman Bros and a global credit crash, Australia’s Big Four banks were all forced to raise new capital – twice. The collapse of bank share prices in the lead-up to the raisings came as surprise to many a local bank analyst, who up to that point had ensured investors that banks are defensive stocks in times of crisis.

This attitude surprised FNArena, given the crisis at hand was a financial crisis at its heart, rather than a general market blow-off from over-exuberance such as the Crash of ’87. Surely banks were at risk, FNArena argued, and indeed they were.

So perplexed was I with bank analyst calls I asked to meet with the only analyst, as far as I could ascertain, who in defiance of his peers had strongly warned that the banks were in big trouble. Why, I asked Brian Johnson, a former colleague in a previous life as an investment banker, did the rest of them get it so wrong? Because they’re not old enough to remember, he said, how in the early nineties recession Westpac ((WBC)) nearly went broke. Their charts only go back five years, and they have never seen anything like this before.

The risk at the time was that banks would suffer a huge blow-out in bad debts. As a result, all the banks took major provisions onto their balance sheets for such an outcome, killing off all earnings growth potential in the near term. They then went to the market for more capital, and then they went one more time.

History shows that Australia made it through the GFC relatively unscathed. The avalanche of bad debts expected to hit banks never occurred. Thus as each successive year passed, the banks were able to gradually bring increasingly unnecessary provisions back into their P&Ls to show solid earnings growth, from which they were able to pay handsome dividends and thus attract yield-thirsty shareholders here and abroad. At the same time, the banks tightened their lending conditions such the likelihood of any new debts turning bad was minimal.

It’s now seven years since the fall of Lehman. It’s taken that long for two post-GFC assumptions to come to pass, coincidentally. 2015 will go down as the year global regulators finally began the process of implementing “too big to fail” capital requirements and the year Australia’s Big Four ran out of surplus bad debt provisions. Indeed, given the strictness of bank lending in the interim, Australian bad debt levels have reached historical lows.

The only way from here, therefore, is up.

On top of global regulations, we’ve seen local tightening from APRA both on investment mortgage lending specifically and on additional capital buffer requirements for Australia’s own TBTF banks, albeit the latter is yet to be fully resolved. With regard the former, the banks have been able to offset lost earnings potential with mortgage repricing, but just how far can the banks push the cost of lending before orchestrating a destructive house price collapse?

The bottom line is that if bad debts begin to rise again, as analysts assume they soon will, and regulators decide more capital is needed to protect against another GFC event, the first thing to give way will likely be bank dividends, as previously discussed by FNArena in ANZ Dividend Cut Inevitable?

The next thing to “give way” would be capital ratios, leading to the necessity of another round of capital raisings.

Brian Johnson, now of CLSA, believes the combination of higher capital requirements and weak earnings growth will lead to potential big bank dividend payout ratio cuts of 10%, translating to actual dividend cuts of 15-25%.

Johnson notes that bank share prices have de-rated substantially since their (yield-driven) peaks in April this year. Capital raisings, uninspiring FY15 earnings results, a deteriorating macro environment (China), the threat of a US rate rise (Australian yield less attractive), and the threat of a bursting of the housing bubble have all conspired. The earnings the banks have managed to post have been enhanced by aforementioned historically low loan losses and by low quality tax items, to the extent Johnson suggests the banks have “over-earned” by 10%.

At some point the banks will suffer from not having any more provisions to draw upon. And at some point APRA will reach a conclusion on just what level of capital Australian banks must hold. Not just capital, but liquidity, loan duration and possible “bail in” bond* issuance as well.

*See aforementioned Beyond Reporting Season article for an explanation.

This time, however, Johnson is not a lone voice. Most Australian bank analysts are approaching the sector with caution. Morgan Stanley is one house that stands out as having correctly insisted the banks would need to raise capital at least once, as they have done, and is now most insistent dividend cuts are coming.

Yet individually, bank analysts have substantially more Buy ratings on the banks than they do Hold or Sell. The reason is that bank share prices have fallen so far as to have dropped well below analyst target prices. This would suggest that at current levels, bank shares are now “value”.

Johnson believes the banks will ultimately have to target tier one capital ratios of 10.5%. On that basis he believes share prices have further downside to suffer. However, once that downside plays out, when the banks all undertake a second round of capital raisings, then there will be value to be found.

“History tells us that when it comes to banking, you make the serious money on the last recapitalisation raising,” said Johnson in a recent note. “During the recapitalisations of 2008/2009 most of the banks came back to raise capital on two separate occasions. From a sectoral perspective, we would recommend staying Underweight but would look to participate in what we believe would be the last round of recapitalisations”.

Underweight is CLSA’s sector call. Within the sector, Macquarie Group ((MQG)), National Bank ((NAB)) and Westpac ((WBC)) are preferred over ANZ Bank ((ANZ)), Commonwealth Bank and the regionals, Bendigo & Adelaide Bank ((BEN)) and Bank of Queensland ((BOQ)).

Note that FNArena’s broker database, in which CLSA is not included, rates the big banks in the consensus order of preference of Westpac, ANZ, CBA, NAB.
 

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article 3 months old

Upside Pending For CBA

By Michael Gable 

Last week, we mentioned the resilience of the market and the likelihood of buying coming back in. We noted that an eventual move above 5100 would indicate a buying opportunity, with a target of around 5450 for the S&P/ASX 200 Index. Before we know it the market, is already getting close to 5300 again. Today we update charting levels for Commonwealth Bank ((CBA)).
 


Five weeks ago, as CBA was trading at $76.43, we noted a few bullish signals. There was the pullback to the long-term uptrend line, the almost perfect 3-wave decline from the high, and the buy signal on the MACD. We anticipated CBA to go up and hit resistance at just over $80. It is at that level now and given the strength of last week's move, we expect it to push through that. For the next few days however, expect some softness in the share price in the order of about a dollar or two. From that level, CBA is then likely to push higher again. We have further resistance near $83 and then $86.


Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

Regulatory Concerns Pierce Thorn’s Outlook

-Consumer leasing review uncertainty
-Commercial finance driving growth
-Equipment finance achieves scale
 

By Eva Brocklehurst

Thorn Group ((TGA)) delivered a consistent result in its first half but the potential for regulatory changes overshadows the stock, brokers maintain.

Radio Rentals is strong, although growth is slowing. The outlook for this division appears tougher to brokers now, although strong take-up of the 48-month contract is in evidence. The government is reviewing the consumer leasing sector and this has created uncertainty.

Commercial finance was aided by the CRA acquisition, while consumer finance struggled. Overall, first half revenue was up 7.0% with an increased dividend of 5.5c. Net receivables were up 87.6% and earnings margins improved to 18.9% from 17.3%. Impairment ratios were also seen improving in 70% of the book.

The second half should benefit from the cycling of one-off costs and Morgans expects the commercial finance division will be the driver of growth. The company is expected to adapt to any changes in the consumer leasing division but, given a maturing earnings profile, any impact on FY17, such as interest rate caps, would create a ill-timed headwind in the broker's opinion.

Goldman Sachs certainly believes regulatory risk is increasing. The broker's main concern is whether tighter credit approval criteria will constrain consumer leasing originations in the future. Goldman downgrades FY17-18 earnings forecasts by 1-3%, reflecting lower rental asset originations and assumes the company does tighten its approval criteria.

Equipment finance appears to be reaching critical mass but the broker observes other newer segments are languishing. Goldman forecasts equipment finance to exceed 20% return on equity (ROE) in FY16 driven by the use of debt and the CRA contribution. ROE in the other two new divisions remains in single digits. Goldman, not one of the eight brokers monitored daily on the FNArena database, retains a Neutral rating and $2.37 target.

Credit Suisse finds the stock's valuation attractive, but it too is concerned about regulatory risk and the potential to offset earnings momentum.

One of the recommendations from ASIC (Australian Securities and Investments Commission) was that consumer leases be subject to the same regulations as small-amount credit contracts (payday loans) and, while it appears that the majority of the company's loans are below the implied interest rate caps, the picture is not entirely clear on the full product suite.

Therefore, until the government decides on what changes will be made, if any, Credit Suisse also retains a Neutral rating. The broker has made marginal upward earnings revisions of 2-3%, because of the strong performance in commercial financing but downgrades its target to $2.15 from $2.85 because of the heightened regulatory risk.

There are three Hold ratings for Thorn on FNArena's database with the consensus target of $2.48 suggesting 23.5% upside to the last share price. The dividend yield on FY16 and FY17 estimates is 6.3% and 6.7% respectively.
 

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article 3 months old

ANZ Dividend Cut Inevitable?

By Greg Peel

As was noted in FNArena’s recent Australian bank update, Beyond Reporting Season, brokers were surprised the recent bank reporting season did not reveal any increase in bad and doubtful debts (BDD) across the sector. But analysts are convinced it’s only a matter of time.

BDDs peaked after the GFC and have gradually fallen ever since, reaching historically low levels by the last bank reporting season in May. A low interest rate environment and banks’ stricter lending criteria mean fewer borrowers have been getting into trouble, and fewer applicants have been granted loans in the first place.

Eventually BDDs will cycle back towards more “normal” levels, bank analysts believe. Meanwhile, the banks may have all raised new capital and repriced mortgages to cover fresh regulatory requirements but more could yet be needed as both global and domestic regulatory requirements are still being assessed and defined. If we combine the two possibilities – increasing bad debts and yet more onerous capital obligations – something has to give. That would be dividends.

Of all the FNArena database brokers, Morgan Stanley was the most insistent from six months ago that all four major banks will be forced to raise capital to cover global “too big to fail” requirements, an additional domestic TBTF buffer and tighter mortgage risk weighting. Other brokers hoped a combination of time to comply, allowing for organic capital growth, and dividend reinvestment plans might get some banks over the line. This was not the case.

Morgan Stanley is now the most insistent among brokers the banks may well be forced to cut their dividends. Of the four, the broker rates ANZ Bank ((ANZ)) as the most likely.

ANZ reset its dividend payout ratio to 65-70% in 2013 from a previous 67%, with “a bias towards the upper end of the range in the near term”. Only last week the bank reiterated that it expects to fully frank its dividends for the foreseeable future. But ANZ’s Asian exposure is throwing up two issues.

Firstly, ANZ only generated 61% of its FY15 profit in Australia. Eventually the bank must run out of franking credits. Secondly, while Australia’s BDDs remain historically low for now, ANZ’s Asian BDDs have risen, especially in Indonesia.

Moreover, when ANZ paid a flat year on year final dividend for FY15 it pushed its payout ratio to 71%, Morgan Stanley notes, above the bank’s stated range. If the dividend were to remain flat that ratio would hit 75% in FY17. Morgan Stanley further calculates that even at a 70% payout, FY16 dividends could only be around 90% franked. Or looking at it the other way, full franking could only be sustained on a payout ratio of 60-65%.

While ANZ’s board may feel anything less than full franking which Australian banks have come to take for granted might not be well received by shareholders, Morgan Stanley believes a slight trim (80-90%) is no big deal and the bank is likely to set its dividend policy based on a sustainable payout ratio rather than shareholder tax issues. If there are no longer excess franking credits to absorb, why persist with an above-range payout?

ANZ has a new CEO. New CEOs are notorious for resetting the bar lower shortly after they arrive, copping short term pain but rebasing for upside during their tenure. Resetting ANZ’s dividend payout ratio would be something the new CEO may well be considering, Morgan Stanley suggests.

To put the numbers into perspective, were ANZ to drop its payout right down to 60% this would represent a dividend cut of 17% to 150c (albeit fully franked), Morgan Stanley calculates. If ANZ’s bad debt impairments were not to rise as the broker is forecasting, the cut would be 15% to 154c.

Among the FNArena database brokers, there is a consensus preference for the two big retail banks over National Bank (business banking bias) and ANZ (Asian exposure). However Commonwealth Bank’s ((CAB)) persistent sector premium means broker consensus has CBA as third preference behind Westpac ((WBC)) and ANZ, with NAB least favoured.

ANZ attracts four Buy, three Hold and one Sell (or equivalent) ratings on an average target of $30.90, suggesting some 18% upside from the current traded price. Forecasts suggest a yield at the trading price of 7.0% for FY16, fully franked, but clearly both are subject to possible reductions.
 

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