Is NZ’s Financials Sector Well-placed For Revival - 2 Stocks to Consider

Overview:

Heartland Group Holdings Limited (NZX:HGH) is the financial services group with operations in New Zealand and Australia. Templeton Emerging Markets Investment Trust Plc (NZX:TEM) is focused towards providing long-term capital appreciation for the investors, through investment in companies operating in emerging 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 dated 10^th July 2024, the restrictive monetary policy has reduced the consumer price inflation and the Committee is expecting headline inflation to return to within the 1% - 3% target range in H2 of this year. The decline in inflation implies receding domestic pricing pressures, as well as lower inflation for goods and services which are imported into New Zealand. Notably, the labour market pressures have eased, implying cautious hiring decisions by the organisation and increased labour supply. The level of economic activity, which includes business and consumer investment spending and investment intentions, remains consistent with the restrictive monetary stance. 

Some of the domestically generated price pressures are strong. However, there are signs inflation persistence would ease in line with the fall in capacity pressures and business pricing intentions. The Committee mentioned that monetary policy would remain restrictive. The extent of this restraint is expected to be tempered over time consistent with the anticipated fall in inflation pressures.

The global consumer price inflation is trending down. This provided some central banks the confidence to either start, or to signal, gradual reduction in policy interest rates. Notably, the monetary policy is at restrictive levels in most of the advanced economies, and the recent stalling in global disinflation tempered market anticipations of the speed of official rate reductions.

Exhibit 1: Rate of Inflation (%)

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

Sector Lending Summary – Banks & NBLIs (June 2024)

As per RBNZ, housing lending stock witnessed rise of $905 Mn (0.3%) in June 2024, down on the $1.2 Bn increase which was reported last month. The annual growth rate fell from 3.3% to 3.2%. The personal consumer lending stock fell by $27 Mn (-0.2%) in June 2024, as a result of the $24 Mn (or -0.3%) decline from NBLIs. The annual growth rate declined from 2.5% to 1.8%, marking the lowest rate since December 2022. The business lending stock fell by $561 Mn (-0.4%), marking the largest monthly drop in business lending since the month of July 2023. The annual growth rate fell from 3.0% to 2.2%.

The agriculture lending stock rose by $376 Mn (0.6%) in June 2024.

Exhibit 2: Annual Growth Rate (%)

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Credit Card Summary (June 2024)

As per credit card summary release dated 19^th July 2024, seasonally adjusted total billings in New Zealand fell to $4.3 Bn in June 2024, down 0.7% from May 2024, and down 3.1% from June 2023. The seasonally adjusted domestic billings on New Zealand issued cards amounted to $3.8 Bn in June 2024, down 0.4% from May 2024, and down 4.2% from June 2023. The overseas billings on New Zealand issued cards amounted to $0.7 Bn, down by 4.9% from May 2024. Annually, there was an increase of 6.1% from June 2023.

Notably, total credit limits were $21.0 Bn (not seasonally adjusted) in June 2024. This was similar to May 2024. This was lowest value since January 2015 month.

Exhibit 3: 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:

Notably, the slow fall in domestic inflation poses a risk to inflation expectations. Overall, the broader financial sector in NZ is exposed to the risks such as interest rate fluctuations, global economic slowdown, higher inflation, lower business confidence, etc. Some other additional risks include continued regulatory pressure as well as higher costs.

The non-performing bank loans as well as corporate insolvencies have increased from the lower levels in line with fall in the economic activity. These metrics are slow moving. Therefore, the measures of financial stress are anticipated to keep rising. Notably, bank credit growth is subdued, in accordance with weakness in domestic economy.

Exhibit 4. Key Risks in Financial Sector:

Source: Analysis by Kalkine Group

Outlook:

RBNZ stated that current and expected government spending would be restraining overall spending in the economy. However, the favourable impact of the pending tax cuts on private spending is less certain. The global economic growth is below trend and is expected to pick up only gradually over the upcoming year. The economic outlook varies among NZ’s trading partners and economic growth in the US is stronger than in many other advanced economies. Meanwhile, economic growth in China is expected to be subdued relative to recent norms.

The Committee agreed that NZ’s restrictive monetary policy has been reducing domestic demand as well as consumer price inflation. It is confident that inflation would be returning to within 1%-3% target range over H2 FY 2024.

The Committee assessed the impact of fiscal policy as announced in Government’s Budget 2024. The government expenditure is expected to fall as the share of the economy in upcoming years. Members noted timing differences between impact of reduced government spending and changes in tax policy. The lower government spending is contributing to weaker demand and would continue to do so. However, the positive impact of tax cuts on private spending is yet to take place. 

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 995.7 million, Annual Dividend Yield (TTM)¹: 12.45%)

Business Description:

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

Outlook:

HGH announced that its subsidiary Heartland Bank Australia Limited successfully completed inaugural A$50 Mn Tier 2 Subordinated Note transaction on 28^th June 2024, arranged with the support of Westpac Banking Corporation. Also, HGH confirmed the completion of Heartland Bank Limited's acquisition of Challenger Bank Limited from Challenger Limited. The acquisition was the critical step in Heartland's strategy for achieving the long-term growth ambitions and expansion in the Australian market. For FY 2028, the company is targeting underlying NPAT of more than $200 Mn.

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

Technical Overview:

HGH Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

While undergoing a downtrend, HGH’s stock prices broke above a descending wedge pattern, indicating a positive bias in the near term. Since then, the stock has formed higher highs and higher lows, suggesting that the short-term rally might continue to remain in place. Moreover, the momentum oscillator RSI (14-period) is trading above the midpoint, adding further evidence to the previous analysis. Prices are trading above both trend-following indicators 21-day and 50-day SMAs, which might function as dynamic support levels for the stock; in contrast, the stock’s previous peak may act as a resistance level. A significant support level for the stock is positioned at NZD 1.0, while critical resistance level is located at NZD 1.19.

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 1.07 per share, up by 1.90% as on 8^th August 2024. 

2) Templeton Emerging Markets Investment Trust Plc (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 3.57 Bn, Annual Dividend Yield (TTM)¹: 3.13%)

Business Description:

Templeton Emerging Markets Investment Trust Plc (NZX: TEM) is focused towards providing long-term capital appreciation for the investors, through investment in companies operating in emerging markets.

Outlook:

The company stated that, while there has been a significant deterioration in the global environment, it considers that the equity markets in which TEMIT invests are less expensive as compared to those of developed markets. Also, the prospects for economic growth in emerging markets seem to be superior. These 2 factors are expected to make emerging market equities very appealing for the long-term investment.

Technical Overview:

Technical Commentary

On the daily chart, TEM’s stock prices are trading near the lower boundary of a trading range established since September 2023, anticipating for a potential minor correct to the lower boundary  of the mentioned sideways period. Moreover, the momentum oscillator RSI (14-period) is rebounding near its overbought region, adding more evidence to the previous observation. Prices are trading above both trend-following indicators 21-day and 50-day SMAs, which might function as dynamic support levels for the stock; in contrast, the stock’s previous peak may act as a resistance level. A critical support level for the stock is positioned at NZD 3.0, while critical resistance level is located at NZD 3.70.

TEM Daily Technical Chart, Data Source: REFINITIV

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 3.30 per share, down by 0.90% as on 8^th August 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 August 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.