Can Reserve Bank of New Zealand Support Broader Financial Services Sector– 2 Stocks to Consider

1.Sector Landscape and Outlook

According to the Fortnightly Economic Update dated 17^th March 2023 released by Treasury.NZ, inflationary pressures has been witnessed in various parts of the world, where the NZ economy contracted ~0.6% particularly after growth in the September quarter. Retail sector activity fell ~1% and Private spending was also flat in the December quarter.

As per the data published in Monetary policy statement in February 2023 by RBNZ, Global economic growth is expected to slow in 2023 owing to worldwide commotion like, war in Ukraine, high inflation, and higher global interest rates on economic activity. However, the International Monetary Fund (IMF) has slightly increased its global annual average growth forecast over 2023 by ~0.2 percentage points to 2.9% since October.

Total Housing Lending Stock Witnessed an Increase

As per RBNZ, total housing lending stock witnessed an increase of NZD 613mn (or 0.18%) in January 2023. As per the release, the annual growth rate has been trending downwards from 4.4% to 4.1%. Notably, this was the lowest monthly percentage growth in lending stock since July 2012 (excluding the level 4 lockdown in Apr-20). Total personal consumer lending stock witnessed a decrease by NZD 30 Mn (or -0.2%) in January 2023. However, annual growth rose further from 1.2% to 2.1%, its highest level since May 2019.

Total business lending stock witnessed a fall of NZD 754 Mn (or -0.6%), driven by decline in commercial lending. Annual growth witnessed a fall from 7.9% to 6.7% in January 2023. It needs to be noted that total agriculture lending stock increased by NZD 226 Mn. This drove annual growth up from 0.3% to 0.5%, which was the highest annual growth rate since December 2019.

Exhibit 1: Lending Pattern– Banks and NBLIs

Data Source: This work is based on/includes rbnz data which are licensed by rbnz.govt.nz for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Overall Financial Market Sentiments:

As stated in RBNZ’s Monetary Policy Statement released in February 2023, since the November statement, the US dollar index has depreciated by 2% and the US S&P 500 equity index has increased by 3%. This shows the increasing confidence among investors that headline inflation has peaked across most of the economies, along with a slight improvement in the global economic growth outlook, particularly for China and the euro area.

However, as per Fortnightly Economic Update on 17^th March 2023, the flare up in the equity market stress from the collapse of Silicon Valley Bank (SVB) in the month of March led to a sharp sell-off in global equity markets, concentrated in banking share prices, and shifted financial market expectations of central bank policy across developed economies. However, the report also stated that the direct implications of the SVB collapse for New Zealand are limited. Moreover, the Reserve Bank’s prudential framework, comprising liquidity mismatch ratios and core funding ratios reduces banks’ vulnerability to rising interest rates and deposit outflows.

Managed Funds 4QFY22

As per RBNZ’s report survey for 4QFY22 (Managed Funds Survey) released on 1^st March 2023, total value of funds under management increased to NZD 251.5bn (up by ~1.5%) for the quarter ending 31st December 2022 but is still down 4.9% annually.

Exhibit 2: Trend of Total Funds under management in NZ (NZD Mn)

Data Source: This work is based on/includes rbnz data which are licensed by rbnz.govt.nz for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Analysis by Kalkine Group

Key Risks and Challenges:

As per RBNZ, increased number of downside risks to the global economic outlook are present. The financial markets are volatile, and there has been increasing uncertainty regarding the extent to which economic activity could slow down due to the tightening of monetary policy. Therefore, financial stability risks have increased. Events like SVB collapse and other global events could arise broader contagion risks to NZ.

The factors impacting the financial market are primarily driven by elevated inflation, higher interest-rate policy, a strong dollar as well as geopolitical tensions.

Exhibit 3. Key Risks in Financial Sector:

Source: Analysis by Kalkine Group

Outlook:

As per treasury.govt.nz’s Fortnightly Economic Update released on 17^th March 2023, inflationary pressure is expected to remain in the near-term and prices are likely to increase for fresh food and fuel as freight is redirected through longer routes away from damaged road and rail. Though the demand has elevated since the time of COVID-19, the outlook for the economy over the medium-term was a lot more uncertain.

In order to address the above-mentioned factors and specially to keep inflation in the target range (within ~1-3% per annum), Reserve Bank of New Zealand plays an important role and has increased Official Cash Rate – OCR. Therefore, in order to curb inflation, the Monetary Policy Committee decided to increase OCR from 4.25% to 4.75%. The OCR sets the interest rates on the deposits and loans that registered banks have with Reserve Bank.

The Committee noted that demand in the NZ economy remained robust through 2022, even though there were several global as well as domestic challenges. Notably, economic growth was underpinned by resilient household spending, construction activity, government spending, and the swift recovery in international tourism as the border reopened.

Apart from the sector-specific factors, an analysis on 2 NZX-listed companies is provided. This report covers their insights, outlook, performance, and potential as expected to be delivered in the near to medium term.

1) Heartland Group Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 1.06 billion, Annual Dividend Yield (TTM)¹: 9.73%)

Business Description: Heartland Group Holdings Limited (NZX: HGH) is a financial services group with operations in New Zealand and Australia. The company’s segments include Motor, Reverse mortgages, Personal lending, Business, Rural, StockCo Australia and Australia.

Outlook

2HFY23 is expected to bring out the similar results of 1HFY23 on an underlying basis. Where continued growth is expected in Motor and Asset Finance, on the other hand, usual seasonal fluctuations are expected to contribute to a better half for StockCo Australia and Heartland Bank’s Rural portfolio in New Zealand. With the stabilization in Net Interest Margin (NIM), HGH expects its NPAT for FY23 to be within NZD 109mn to NZD 114mn, excluding any impacts of fair value changes on equity investments held and the impact of the de-designation of derivatives.

Fundamental Valuation:

P/BV Multiple Based Relative Valuation

Technical Overview:

Technical Commentary

On the daily chart, HGH prices are hovering around the falling trendline support level. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~29.463 level. However, the prices are trading below the trend-following indicators 21-period SMA, which may act as a resistance zone. An important support level for the stock is placed at NZD 1.35 while the key resistance level is placed at NZD 1.65.

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing price of NZD 1.500 per share, down by 4.46% as on 23 March 2023. 

2) Marlin Global Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 175.097 million, Annual Dividend Yield (TTM)¹: 8.813%)

Business Description: Marlin Global Limited (NZX: MLN) a listed investment company, it invests in growing companies based outside of New Zealand and Australia. MLN invests in a diversified portfolio of between 20 and 35 growing international companies, in West Europe, South America, North America, and Asia. 

Outlook: As per the monthly update as at 28th February 2023, MLN Net Asset Value stood at NZD 0.8749. The company continues its search of finding attractive investment opportunities with high-quality and growing businesses and create value for shareholders in the years ahead.

It is encouraging to see that the portfolio companies have reacted to growth slowdown and are right sizing their cost bases which will set them up for better earnings growth in the future. However, the MLN’s team has remained disciplined through the period, focussing on well managed, quality businesses and adhering to a robust investment process.

Technical Overview:

Technical Commentary

On the daily chart, MLN prices are trading near the horizontal trendline support level. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~31.741 level. However, the prices are trading below the trend-following indicators 21-period SMA, which may act as a resistance zone. An important support level for the stock is placed at NZD 0.780 while the key resistance level is placed at NZD 0.980.

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing price of NZD 0.860 per share, up by ~1.18% as on 23 March 2023.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: Past performance is neither an indicator nor a guarantee of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance levels is March 23, 2023. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Note 4:  Annual Dividend Yield is on a Trailing Twelve Month (TTM¹) basis and are subject to change based on factors such as company performance, stock price changes, etc.

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest. Support 1 refers to the nearby support level for the stock and if the price breaches the level, then Support 2 may act as the crucial support level for the stock.

Resistance: A level at which the stock prices tend to find resistance when they are rising, and an uptrend may take a pause due to profit booking or selling interest. Resistance 1 refers to the nearby resistance level for the stock and if the price surpasses the level, then Resistance 2 may act as the crucial resistance level for the stock.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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