How Will NZ’s Financials Sector Revive From Uncertain Macro Environment- 2 Stocks to Consider

Overview:

Heartland Group Holdings Limited (NZX: HGH) is the financial services group with operations in New Zealand and Australia. Marlin Global Limited (NZX: MLN) is a listed investment company which invests in growing companies based outside of New Zealand and Australia.

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 22^nd May 2024, restrictive monetary policy reduced capacity pressures in NZ economy as well as lowered consumer price inflation. The annual consumer price inflation is expected to return to within the Committee’s 1% - 3% target range by the end of 2024. The fall in inflation in part reflects decreased inflation for goods and services imported into NZ.  Globally, consumer price inflation fell from 30-year highs in many advanced economies. However, services inflation has been receding slowly, and anticipated policy interest rate cuts are being delayed.

As per the release, in NZ, pressures in labour market have eased.  The businesses are employing more cautiously in line with weak economic activity. Notably, the number of people available to work increased because of recent high net inward migration. Wage growth as well as domestic spending are easing to levels more consistent with the Committee’s inflation target.

While discussing global financial conditions, the Committee mentioned that persistent inflation in some of NZ’s key trading partners resulted in fewer policy interest rate cuts being priced in by financial markets. The increased long-term wholesale interest rates globally have helped wholesale interest rates in NZ. The participants in global financial markets are exhibiting confidence in corporate earnings outlook, as reflected in equity prices and credit spreads.

Sector Lending Summary – Banks & NBLIs (March 2024)

As per RBNZ, the housing lending stock rose by $1.1 Bn (or 0.3%) in March 2024, which was the largest monthly increase reported since June 2023. The annual growth rate increased from 3.0% to 3.1%. Notably, the personal consumer lending stock declined by $78 Mn (or 0.5%), which was the largest monthly decrease reported since March 2022. The monthly decrease consists of $36 Mn (or 0.5%) and $42 Mn (or 0.6%) stock declines from banks and NBLIs, respectively. The annual growth rate fell from 3.7% to 3.5%.

The business lending stock increased $131 Mn (or 0.1%), with NBLIs lending stock rising by $179 Mn (or 1.9%). The annual growth rate rose from 1.7% to 2.2%.

Exhibit 1: Sector Lending Summary – Banks & 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 Summary (April 2024)

As per credit card summary release dated 21^st May 2024, seasonally adjusted total billings in New Zealand stood at $4.4 Bn in April 2024, down 2.0% from March 2024 as well as down 0.6% from April 2023. The seasonally adjusted domestic billings on New Zealand issued cards amounted to $3.8 Bn in April 2024, down 1.1% from March 2024, and down 2.4% from April 2023.

The overseas billings on NZ issued cards were $0.7 Bn, up by 14.8% from March 2024. Annually, there has been an increase of 31.2% from April 2023. The billings in New Zealand on overseas issued cards declined by 19.0% from last month to $0.6 Bn. Annually, billings on overseas issued cards were up 16.6%.

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

Key Risks and Challenges:

Even though weaker capacity pressures as well as easing labour market are reducing domestic inflation, the decline is tempered by sectors of the economy which are less sensitive to interest rates. Such near-term factors consist of increased dwelling rents, insurance costs, council rates as well as other domestic services price inflation. The slow decline in domestic inflation poses a risk to inflation expectations.

The aggregate global economic growth was below trend last year and is anticipated to slow further in 2024. However, the economic outlook varies among NZ’s trading partners.

Exhibit 3. Key Risks in Financial Sector:

Source: Analysis by Kalkine Group

Outlook:

Most of the mortgage borrowers have repriced onto increased interest rates as anticipated, with increasing nominal incomes supporting many households navigate this transition. Some of the businesses are facing ongoing pressure from higher costs and lower economic activity. While non-performing loans to businesses rose, they remain low as compared to historical standards. The near-term risks to the agricultural sector have eased following the recent recovery in dairy prices.

The global inflation is declining from elevated levels as well as financial markets have priced in lower policy rates over the next year. Notably, New Zealand’s financial system is well placed to handle a range of severe scenarios. The banks’ capital ratios have increased ahead of higher future requirements as well as liquidity positions are strong.

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 921.2 million, Annual Dividend Yield (TTM)¹: 13.45%)

Business Description:

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

Outlook:

HGH announced that it intends to appoint Robert (Rob) Bell as well as Simon Beckett as independent, non-executive directors (subject to Reserve Bank of New Zealand non-objection), with effect from 27^th June 2024. HGH confirmed the completion of Heartland Bank Limited’s acquisition of Challenger Bank Limited from Challenger Limited.

In the long-term, HGH is expected to continue the growth story. The organic growth is expected to improve in line with reduced inflation. Similarly, cost of funds and NIM are expected to improve as and when there is easing in interest rates.

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

Technical Overview:

HGH Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

On the daily chart, HGH’s stock prices are forming downtrend characterized by lower highs and lower lows, indicating a negative bias. conversely, after forming a bottom divergence in relation to prices, the momentum oscillator RSI (14-period) is rebounding from its oversold region, anticipating for a potential minor rally. Prices are trading below both trend-following indicators 21-periond and 50-period SMAs, which might function as dynamic resistance levels for the stock; in contrast, the stock’s previous low may act as a support level. An important support level for the stock is placed at NZD 0.900, while key resistance level is situated at NZD 1.10.

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 0.990 per share as on 30^th May 2024.

2) Marlin Global Limited (Recommendation: Hold, Potential Upside: Low Double-Digit) (M-Cap: NZD 210.5 Mn, Annual Dividend Yield (TTM)¹: 7.41%)

Business Description:

Marlin Global Limited (NZX: MLN) is a listed investment company which invests in growing companies based outside of New Zealand and Australia.

Outlook:

The April was a tougher month for equity markets. Notably, hotter-than expected US inflation, the risk of escalation in the Middle East boosting oil prices, as well as Federal Reserve officials talking down rate cut expectations led to higher interest rates and lower equity markets. The China continued its robust 2024 performance, with MSCI China index rising 6.5%, and rising 20% from January lows.

While the economy is not out of the woods yet, the better-than-expected first quarter GDP print as well as cheap valuations witnessed renewed interest from investors.

Technical Overview:

Technical Commentary

On the daily chart, MLN’s stock prices are forming a trading range characterized by identical highs and lows, suggesting that the sideways period in the stock might continue to persist in the near future. Moreover, the momentum oscillator RSI (14-period) is trading near the midpoint, adding further evidence for the mentioned recommendation. Prices are trading between its previous peak and trough, which might function as resistance and support levels for the stock, respectively. An important support level for the stock is placed at NZD 0.880, while key resistance level is situated at NZD 1.13.

MLN 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 0.980 per share, down by 1.01% as on 30^th May 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 May 30, 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.