How NZ’s Financial Services Sector Will Overcome Current Challenging Environment – 2 Stocks to Consider

Company Overview:

Westpac Banking Corporation (NZX: WBC) is the banking company which provides a range of consumer, business as well as institutional banking and wealth management services through the portfolio of financial services brands and businesses. Kingfish Limited (NZX: KFL) is a listed investment company that invests in growing New Zealand companies.

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

1. Sector Landscape and Outlook

In the release dated 16^th August 2023, Reserve Bank of New Zealand agreed to maintain Official Cash Rate (or OCR) at 5.5% and it was mentioned that New Zealand economy has been evolving broadly as anticipated. Activity has been slowing in parts of the economy which are more sensitive to interest rates. Labour shortages are easing as overall demand softens as well as immigration adds to labour resources. Headline inflation and inflation expectations witnessed a decline, but measures of core inflation remained high. Globally, economic growth remained below trend as well as headline inflation eased for most of the NZ’s trading partners. Core inflation remained high in several countries. Weakening global economic growth has been putting downward pressure on the NZ export prices.

The imbalance between demand and supply has been moderating in the broader NZ economy. However, the prolonged period of subdued spending growth is needed to better match the supply capacity of NZ economy and decrease the inflation pressure. NZ’s export volumes over the last quarter were more resilient than anticipated because of favourable agricultural growing conditions in some of the regions. However, the export revenues are anticipated to ease, in line with weakening of the global demand.

Sector lending summary – Banks & NBLIs

As per RBNZ’s release dated 31 August 2023, housing lending stock witnessed a rise of $679 Mn (or 0.2%) in the month of July 2023, which was down on the $1.2 Bn increase reported last month. The total housing lending rose by $5.2 Bn from the start of 2023. Notably, the annual growth rate declined from 3.1% to 3.0% in July 2023. The personal consumer lending stock rose $21 Mn (or 0.2%) in the month of July 2023. The annual growth rate witnessed a rise from 4.6% to 5.1% this month.

The business lending stock witnessed a decline by $1.1 Bn (or -0.8%) in the month of July 2023, which was the largest monthly decline since July 2020. Annual growth fell from 3.1% to 2.1% this month, and was the lowest since August 2021. Notably, the agriculture lending stock rose $271 Mn (or 0.4%), which was down on the $564 Mn increase reported in the previous month. The annual growth rate rose from 1.9% to 2.1%.

Exhibit 1: Lending Pattern Since March 2020 – 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

RBNZ has released credit card summary in which it highlighted key points for August 2023. The seasonally adjusted total billings in NZ stood at $4.5 Bn during August 2023, reflecting a rise of 1.7% from July 2023 and seasonally adjusted domestic billings on NZ issued cards stood at $4.0 Bn in August, a rise of 1.3% from July 2023.

The overseas billings on NZ-issued cards fell from $0.7 Bn to $0.6 Bn in August 2023. Notably, billings on overseas issued cards utilised in NZ were $0.5 Bn, increasing for 2^nd consecutive month. Finally, total credit limits stood at $21.1 Bn (not seasonally adjusted) in the month of August, which was 0.8% lower than August 2022 as well as the lowest value since April 2015.

Managed Funds Survey – Q2 FY 2023

RBNZ has released managed funds survey for Q2 FY 2023 in the release dated 28 August 2023. The total value of funds under management rose $267.9 Bn (or +1.9%) for the quarter ending 30^th June 2023 as well as 10.2% annually. This was above the record high of $264.3 Bn in December 2021. Annually, the total funds under management rose by 10.2%. This was the second quarter with positive annual growth.

The Kiwisaver reflected quarterly and annual growth, increasing by 3.7% and 15.4% respectively. Notably, other superannuation schemes rose 1.5% over the quarter and decreased 4.6% annually.

The fund holdings by asset class witnessed quarterly and annual decrease of units in trusts, down 5.4% quarterly as well as 6.4% annually. The funds held by cash management trusts encountered a significant increase, rising by 7.6% quarterly and 28.8% annually.

Exhibit 2: Trend in Total Funds Under Management (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

Index Performance:

The S&P/NZX All Financials Index generated a 3-month return of ~1.72% versus ~-4.99% by the S&P/NZX All Index. Therefore, S&P/NZX All Financials Index overperformed S&P/NZX All Index by ~6.71% in 3 months.

Exhibit 3: S&P/NZX All Financials Index vs S&P/NZX 50 Index

Key Risks and Challenges:

As per RBNZ, increased number of downside risks to the global economic outlook are present. Notably, the inflationary pressures are prompting central banks for the tightening of monetary policy as compared to the expectations. The financial markets are volatile, and there are uncertainties with regards to the extent to which economic activity might slow down because of the tightening of monetary policy. As the result, financial stability risks have increased.

Over the medium-term, the greater slowdown in global economic demand, mainly in China, might weigh more on commodity prices as well as overall NZ export revenue. The slowdown in demand broadened across the variety of interest-rate-sensitive parts of NZ economy. Business service activity started to fall from early 2023.

Exhibit 4. Key Risks in Financial Sector:

Source: Analysis by Kalkine Group

Outlook:

New Zealand’s financial system is well-positioned to handle the increased interest rate environment as well as international financial disruptions, Governor Adrian Orr stated in releasing the May 2023 Financial Stability Report. The global inflation has been persisting at the levels well above the central banks’ policy targets. Although central banks slowed the pace of tightening recently, the full extent of the impact of previous tightening is yet to be seen. There have been limited signs of distress in banks’ lending portfolios and only small share of borrowers are falling behind on their payments. This reflects strength of the labour market as well as that borrowers have been able to adjust spending or utilise previous savings and repayment buffers. Notably, cash flow pressures among households and in some business sectors are increasing.

The extreme weather events in the North Island which were witnessed earlier caused significant economic disruption as well as physical damage to the affected households, businesses and property. NZ’s financial system has been resilient to such events as well as institutions are working with and are supporting the affected customers.

NZ banking system’s capital as well as liquidity positions are robust and profitability and asset quality remained high. NZ’s banks are not materially exposed to the similar interest rate risks which resulted in some recent bank failures in the US. Overall, NZ’s financial institutions are well placed to continue to take long-term perspective as well as support their customers through current economic challenges.

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 ) Westpac Banking Corporation (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD81.79 billion, Annual Dividend Yield (TTM)¹: 6.84%)

Business Description:

Westpac Banking Corporation (NZX: WBC) is the banking company which provides a range of consumer, business as well as institutional banking and wealth management services through the portfolio of financial services brands and businesses.

Outlook:

WBC has released its Q3 FY 2023 update and the Group delivered unaudited net profit of $1.8 Bn for the quarter. WBC is in robust financial position with capital, funding as well as liquidity well above the regulatory minimums. The credit quality was resilient in Q3 FY 2023 and the group remained well provisioned. The CET1 capital ratio stood at 11.9% as compared to the group’s target operating range of 11.0% - 11.5%, and reflects the earnings for the quarter offset by the payment of H1 FY 2023 dividend.

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

Technical Overview:

Daily Price Chart

Technical Commentary:

On the daily chart, WBC prices are rebounding from the lower boundary of a Symmetrical triangle pattern which have established since April 2023, which indicates that in case the stock manages to surpass the pattern’s upper boundary, it might gain momentum to escalate further. Prices are fluctuating between its previous peak and trough, which might potentially function as resistance and support levels for the stock, respectively. A significant support for the stock is placed at NZD 21.400, while the critical resistance level is located at NZD 25.50.

Stock Recommendation

The stock has been valued using Price/BVPS 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 23.310 per share, down by 0.64% as on 21 September 2023.

2 ) Kingfish Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 405.5 million, Annual Dividend Yield: 9.85%)

Business Description:

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

Outlook:

In August, Kingfish’s gross performance return was down 3.6% as well as the adjusted NAV return was also down 3.6%. This compares to the benchmark S&P/NZX50G, which was down by 4.2%. Notwithstanding the changeable market conditions, the company’s directors are confident in the strategy of focusing towards well-managed, quality businesses, whose sustainable competitive advantages allow them to adapt as well as respond to ever-changing environment over the medium to long term.

Technical Overview:

Daily Price Chart

Technical Commentary:

While experiencing a downtrend, KFL prices are forming multiple bottom divergences compared to the momentum oscillator RSI (14-period) on the daily chart around the oscillator’s oversold region, anticipating for a potential rebound in the near future. Prices are trading below its previous trough which might potentially act as a resistance level for the stock; in contrast, the nearest round price level might serve as a support. An import support for the stock is placed at NZD 1.06, while key resistance level is situated at NZD 1.40. 

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 1.220 per share as on 21 September 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 not a reliable indicator of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance levels is September 21, 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: Kalkine New Zealand Limited’s (Kalkine) Director Kunal Sawhney owns shares of Westpac Banking Corporation since December 2021. Kalkine has recommended Westpac Banking Corporation in its report as general advice only (under FSP Number FSP691351).

Disclaimer

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