How Financial Services Sector Plans to Recover Amidst Inflationary Concerns – 2 Stocks to Consider

Overview:

Heartland Group Holdings Limited (NZX:HGH) is the financial services group with operations in New Zealand and Australia. Kingfish Limited (NZX: KFL) is the listed investment company that invests in growing New Zealand companies.

Kalkine’s Sector Report covers the Key Financial Metrics, Risks, Outlook, Technical Analysis along with the Valuation, Target Price, and Recommendation on the stock.

Sector Landscape and Outlook

As per the release by Reserve Bank of New Zealand dated 29^th November 2023, the monetary policy committee decided to maintain the official cash rate at 5.50%. The interest rates are restricting the spending in the broader economy as well as consumer price inflation has been declining, which is important to meet the Committee’s Remit. However, the inflation is still high, and the Committee remains cautious regarding the ongoing inflationary pressures. Internationally, the economic growth was stronger than expected at the start of this year. However, it remains below trend and is likely to even slow further. This subdued growth outlook is expected to continue to restrain NZ’s export revenues.

While discussing the Remit objectives, the Committee mentioned that inflation is anticipated to fall to within the target band by H2 of 2024. Pressure in the labour market seems to be easing, and employment is above the maximum sustainable level. The members decided that monetary policy is supportive of the sustainable house prices. The committee decided that interest rates are required to remain at the restrictive level for longer, in order to make sure that annual consumer price inflation returns to 1% – 3% target range as well as to help maximum sustainable employment.

Higher Total Housing Lending Stock

As per RBNZ, the total housing lending stock witnessed a rise of $1.1 Bn (or 0.3%) in December 2022. The annual growth rate is trending downwards from 4.8% reported last month, to 4.4%. This was the lowest annual growth rate since the month of February 2013. As per release, total personal consumer lending stock rose $125 Mn (or 0.9%) in December 2022, continuing the positive trend since September 2022 month. The annual growth rate witnessed an increase this month, from 0.3% to 1.2%.

Finally, total business lending stock fell by $385 Mn (or 0.3%), down significantly on the $1.5 Bn increase which was reported in December 2022. Notably, annual growth declined from 8.3% to 7.9% in December 2022.

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

Credit Card Spending Patterns

As per credit card summary release dated 24 January 2024 by RBNZ, the seasonally adjusted total billings in New Zealand stood at $4.5 Bn in December 2023, which was similar to November but up 4.3% from the month of December 2022. The seasonally adjusted domestic billings on NZ issued cards were $3.9 Bn in December 2023, up by 3.1% from December 2022. The overseas billings on NZ issued cards were $0.5 billion, down by 8.7% from November-23. Annually, there was an increase of 9.6% from December-22.

The total credit limits stood at $21.0 Bn (not seasonally adjusted) in December-23 month. This reflects a fall of 1.0% as compared to December-22 as well as the lowest value since February 2015, when limits were $21.0 Bn.

Exhibit 2: Total Billings On New Zealand Cards (NZD Mn) (Actual vs Seasonally Adjusted)

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

New Credit Flows Statistics

RBNZ has released new credit flows statistics (dated 5^th December 2023), in which it was mentioned that there was $10.0 Bn of new lending in October, reflecting a fall of 8.7% from $11.0 Bn in September. As compared to October 2022, the total new lending rose by 4.3% from $9.6 Bn. The category with the largest rise was investment property, which increased to $643 Mn, up by 110.8% (or $338 Mn) from September.

The total monthly new residential lending stood at $5.9 Bn in October, which reflects a rise of 0.9% from $5.8 Bn in September. As compared to October 2022, the total monthly new residential lending rose 10.0% from $5.3 Bn.

Key Risks and Challenges:

The Monetary Policy Committee stated that, while population growth eased supply constraints, the impacts on aggregate demand are becoming apparent. This is increasing the risk of inflation remaining above the target levels. The Committee remains confident that present level of the OCR has been restricting the demand. However, ongoing excess demand as well as inflationary pressures are some of the concerns, considering elevated level of core inflation.

If inflationary pressures remain stronger than was anticipated, the OCR might be increased further. The global economic growth is below trend as high interest rates are impacting the demand. The ease in global demand has been placing downward pressure on NZ exports, and export revenues are lower than in recent years.

Exhibit 3. Key Risks in Financial Sector:

Source: Analysis by Kalkine Group

Outlook:

The global prices for some products, like dairy, have witnessed stabilisation in the recent months. The global growth was stronger than was anticipated at the start of this year, as a result of sustained strength in the US economy as well as recent lift in economic activity in China. However, moving forward, subdued global growth is anticipated to restrict demand and prices for NZ’s exports over the medium term. In NZ, demand growth was eased, but by less than expected over the H1 of 2023 because of robust population growth. The OCR would need to stay restrictive, so that demand growth remains subdued as well as inflation returns to 1% - 3% target range.

Even though there are challenges because of higher  interest rates, there are some signs related to widespread debt-servicing stress in the advanced economies. Non-performing loan ratios are below levels which were witnessed during Global Financial Crisis and banks’ capital and liquidity positions have increased markedly in all the advanced economies since the GFC. NZ has several similarities to other advanced economies and the country compares favourably overall. NZ’s banks are less exposed to commercial property, its lending standards are comparatively tight, and as the country its government debt levels compare well.

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 929.8 million, Annual Dividend Yield (TTM)¹: 12.28%)

Business Description:

Heartland Group Holdings Limited (NZX:HGH) is the financial services group with operations in New Zealand and Australia.

Outlook:

HGH is planning to announce its financial results for the 6-month period ended 31^st December 2023 on 27^th February 2024. The company has released FY 2024 performance update (based on unaudited results ended 30^th November 2023). It witnessed YTD receivables growth of 4.7% , with Australian and New Zealand Reverse Mortgages notably witnessing YTD growth of 20.4% and 17.8%, respectively.

The stronger second half of FY 2024 (H2 FY 2024) is anticipated particularly as the expected backlog of stalled car purchases clears as well as through the impact of now more favourable climactic conditions in Australia. Heartland is expecting NIM to improve in calendar year 2025 as and when the deposit market eases and lower yielding loans are repaid.

Valuation Methodology: Price/BV Per Share Based Relative Valuation (Illustrative)

Technical Overview:

Daily Price Chart

HGH Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

On the daily chart, HGH’s stock prices are undergoing a downtrend characterized by lower lows and lower highs, indicating a negative bias. In addition, the momentum oscillator RSI (14-period) is trading below the midpoint, providing further support for the previous observation. Prices are trading below both the trend-following indicators 21-period and 50-period SMAs, which might function as dynamic resistance levels for the stock; in contrast, the stock’s next round price level may serve as a sentimental support. A significant support level for the stock is positioned at NZD 1.17, while critical resistance level is located at NZD 1.52.

Stock Recommendation

The stock has been valued using P/BV multiple-based illustrative relative valuation, and the target price so arrived reflects a rise of low double-digit (in % terms).

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 1.30 per share, down by 0.76% as on 8 February 2024.

2) Kingfish Limited (Recommendation: Hold, Potential Upside: Low Double-Digit) (M-Cap: NZD 429.3 Mn, Annual Dividend Yield (TTM)¹: 9.37%)

Business Description:

Kingfish Limited (NZX: KFL) is the listed investment company that invests in growing New Zealand companies.

Outlook:

Kingfish's portfolio outperformed the S&P/NZX50G index for 6 months ended 30 September 2023. In particular, this was helped by robust performance from infrastructure investment company Infratil as well as the recovery in retirement village operators, due to residential housing market showing increasing signs of stability.

KFL is targeting companies having robust long-term growth prospects as well as would be adjusting the portfolio as and when the company sees opportunities.

Technical Overview:

Technical Commentary

While experiencing a downtrend, KFL’s stock prices broke above the upper boundary of a descending wedge pattern in January 2024, anticipating for a minor rally. Moreover, the momentum oscillator RSI (14-period) is heading north from the midpoint, adding further evidence for the mentioned recommendation. Prices are trading above both the trend-following indicators 21-period and 50-period SMAs, which might function as dynamic support levels for the stock; in contrast, the stock’s most recent high may act as a resistance. An important support level for the stock is placed at NZD 1.12, while key resistance level is situated at NZD 1.53.

KFL Daily Technical Chart, Data Source: REFINITIV

Stock Recommendation

Considering the facts above, a ‘Hold’ recommendation on the stock has been provided at the closing market price of NZD 1.27 per share, up by 0.79% as on 8^th February 2024.

Note 1: Past performance is not a reliable indicator of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance levels is February 8, 2024. 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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