How will NZ’s Financials Sector Revive Amidst Reasonable Inflation Levels- 2 Stocks to Consider

This report is an updated version of the report uploaded on 14 March 2024 at 5:52 PM GMT +13

Overview:

Heartland Group Holdings Limited (NZX:HGH) is the financial services group with operations in New Zealand and Australia. NZX Limited (NZX: NZX) operates NZ's equity, debt, funds, derivatives and energy markets.

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, over the past year or so, the broader NZ economy evolved as was expected by Committee. The core inflation and most measures of inflation expectations witnessed a decline, and risks to inflation outlook are now more balanced. However, headline inflation is still above 1% - 3% target band, which is limiting Committee’s ability to tolerate upside inflation surprises. The restrictive monetary policy as well as slower global growth led to aggregate demand slowing which has helped in matching supply capacity of NZ economy. With high immigration as well as weaker demand growth, capacity constraints in the NZ labour market have eased.

The Committee is of the view that current level of OCR is restricting the overall demand. However, a sustained fall in capacity pressures in the NZ economy is needed to make sure that headline inflation gets back to 1% - 3% target. The OCR should remain at restrictive level for a sustained period of time to ensure that this occurs.

In the nutshell, the capacity pressures eased significantly over the previous year. The aggregate demand is now better matched with supply capacity of NZ economy. The combination of decreased demand a well as growing supply has been bringing domestic inflation down. Notably, the below-trend global growth and slightly lower prices for NZ’s imported goods and services have supported to lower headline inflation over the recent quarters.

Sector lending & deposits summary – Banks

As per RBNZ, the housing lending stock rose $704 Mn (or 0.2%) in the month of January 2024, slightly up on $673 Mn increase witnessed in January 2023. The owner occupier lending rose $652 Mn (or 0.3%) while residential investor lending increased $52 Mn (or 0.1%). Notably, annual growth in owner occupier lending stayed at 4.2%, with residential investor lending annual growth rising slightly from 0.7% to 0.8%. The personal consumer lending stock fell $80 Mn (or-1.0%), largest monthly fall since the month of Mar 2022.

The business lending stock rose $235 Mn (or 0.2%) in the month of January 2024. SME lending increased $691 Mn (or 0.9%), while large business lending declined by $456 Mn (or -0.9%). The household deposits fell $49 Mn in January 2024 month.

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- January 2024

As per credit card summary release dated 22 February 2024 by RBNZ, the seasonally adjusted total billings in NZ stood at $4.5 Bn in January 2024, similar to December 2023 but down by 0.3% from January 2023. The seasonally adjusted domestic billings on New Zealand issued cards stood at $3.9 Bn in January 2024, reflecting a fall of 1.2% from January 2023. The billings in New Zealand on overseas issued cards increased 7.5% from last month to $0.8 Bn, the highest value since the month of February 2020. Annually, the billings on overseas issued cards increased 6.5%. The overseas billings on NZ issued cards stood at $0.6 billion, reflecting a rise of 11.3% from December 2023 . Annually, there was an increase of 14.3% from January 2023.

The total credit limits amounted to $21.0 Bn (not seasonally adjusted) in January 2024. This was 1.2% lower than January 2023 as well as the lowest value since February 2015 month. The credit limit utilisation (i.e., ratio of total advances outstanding to the total allowable credit limits) fell from 30.2% at the end of December 2023 to 29.6% at January 2024 end.

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

Managed Funds Survey – Q4 FY 2023

RBNZ has released managed funds survey (Q4 FY 2023), wherein, it mentioned that the total value of funds under management rose to $271.2 Bn (or +4.0%) for the quarter ended 31^st December 2023 and rose 8.4% annually. The KiwiSaver recorded quarterly and annual growth, rising 6.6% and 17.2%, respectively. However, other superannuation schemes rose 3.7% quarterly and decreased 8.9% annually. The assets increased for the quarter ending 31 December 2023.  The funds held by cash management trusts witnessed a rise, increasing 3.8% quarterly as well as 20.9% annually. Retail unit trusts also increased this quarter, rising 3.5% quarterly and 16.0% annually.

The Kiwisaver net assets rose 6.6% from $100.8 Bn to $107.5 Bn.

Key Risks and Challenges:

The outlook for China economy is particularly weak relative to recent historical norms, and structural factors are constraining long-term growth. The more general risk to global growth is that central banks might need to maintain policy interest rates at the restrictive levels for longer than currently reflected by financial market pricing, in order to ensure that inflation targets are met. The heightened geopolitical and climate conditions remain risks for the inflation.

Overall, NZ’s economic growth is anticipated to remain subdued in 2024. The continued declines in business investment as well as residential construction account for such weakness.

Exhibit 3. Key Risks in Financial Sector:

Source: Analysis by Kalkine Group

Outlook:

The global growth remained below trend last year. NZ’s trading partner growth is anticipated to slow in 2024 and this would support a further decline in global inflation and NZ import price inflation. The global supply disruptions have eased, and restrictive monetary conditions are contributing to reduced demand. The robust net migration is helping overall demand. The demand impacts of robust population growth are apparent in higher pressure on rents. However, the migration also reflects there are more workers available, helping productive capacity of the NZ economy.

The economic growth along with capacity pressures are anticipated to increase through 2025 and 2026, as and when interest rates begin to decline from their elevated levels as well as higher outlook for the terms of trade helps activity. Notable, the robust migration is adding to demand and supply as net migration increased rapidly since 2022 end, adding 2.4% per annum to population at 2023 end.

The headline inflation throughout the advanced economies continued to fall. Lower energy, food as well as goods inflation contributed to decline in inflation in advanced economies. Oil prices have declined in response to the slowing global demand and supply increases from the non-OPEC countries.

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 936.9 million, Annual Dividend Yield (TTM)¹: 10.6%)

Business Description:

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

Outlook:

The acquisition of Challenger Bank is nearing completion and the regulatory approval process is now in the final stages. Overall, HGH’s performance is demonstrating resilience of Heartland’s core lending portfolios as well as ‘best or only’ strategy. Heartland has growth ambitions which would facilitate cost efficiency and return on equity (or ROE) expansion. Specifically, Heartland is focusing towards achieving underlying NPAT of $200 Mn and an underlying cost-to-income (or CTI) ratio of less than 35% by financial year ending 30 June 2028 (or FY 2028).

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

Technical Overview:

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 contrast, after forming a bottom divergence in relation to prices, the momentum oscillator RSI (14-period) is heading north, anticipating for a minor rally. Prices are trading above the trend-following indicators 21-period SMA but below 50-period one, which might function as dynamic support and resistance levels for the stock, respectively. A significant support level for the stock is positioned at NZD 1.17, while critical resistance level is located at NZD 1.45.

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 current market price of NZD 1.29 per share (New Zealand Time: 12:50 PM (GMT +13)) as on 14 March 2024.

2) NZX Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 333.9 Mn, Annual Dividend Yield (TTM)¹: 8.22%)

Business Description:

NZX Limited (NZX: NZX) operates NZ's equity, debt, funds, derivatives and energy markets.

Outlook:

For FY 2024, NZX is expecting operating earnings of $40 Mn - $44.5 Mn. Despite the challenging economic conditions globally, the New Zealand market delivered capital raising capacity in order to meet issuers’ debt and equity objectives. Also, the diversity of NZX’s product offering and earnings base reflected that it continued to make steady progress on the long-term strategy of expanding product range in capital markets.

The economic conditions provided a tailwind for debt market activity. In 2023, there were 25 primary debt deals with the worth of $6.7 Bn raised, and 34 secondary retail debt deals completed, totalling $2.1 Bn. This equates to the combined total of $8.8 Bn.

Technical Overview:

Technical Commentary

While experiencing a downtrend, NZX’s stock prices are forming a descending wedge pattern, indicating a weakening downside momentum. Moreover, after establishing a bottom divergence in comparison to prices, the momentum oscillator RSI (14-period) is rebounding from its oversold region, adding further evidence for the mentioned recommendation. Prices are fluctuating between its previous peak and trough, which might function as dynamic resistance and support levels for the stock, respectively. An important support level for the stock is placed at NZD 0.92, while key resistance level is situated at NZD 1.11.

NZX Daily Technical Chart, Data Source: REFINITIV

Fundamental Valuation

P/BV Based Relative Valuation

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the current market price of NZD 1.00 per share (New Zealand Time: 12:50 PM (GMT +13)) as on 14^th March 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 March 14, 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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