Will Broader Financial Sector in NZ Be Able to Sustain Current Inflationary 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. Barramundi Limited (NZX: BRM) is a listed investment company that invests in growing Australian 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 Reserve Bank of New Zealand, interest rates are restricting the spending in the overall economy as well as consumer price inflation is declining, which is critical to meet the Committee’s Remit. However, inflation is still too high, and the Committee is still wary of current inflationary pressures.  Internationally, economic growth has been stronger than anticipated at the start of this year but is below trend and is likely to slow even further. This subdued growth outlook would continue to restrict NZ’s export revenues. The Monetary Policy Committee maintained the official cash rate (or OCR) at 5.50%.

In NZ, the demand growth has eased, but by less than expectations over H1 FY 2023 in part because of strong population growth. The OCR would need to stay restrictive, so that demand growth is subdued, and inflation returns to the 1%- 3% target range. RBNZ stated that wage growth eased from the peaks. Demand for labour has been softening, as job advertisements are now below the pre-COVID-19 levels. At the same time, strong inward migration has been increasing the population as well as adding to the labour supply.

The Committee remains confident that the present level of OCR has been restricting demand. However, the ongoing excess demand as well as inflationary pressures are a concern, considering the increased level of core inflation. If inflationary pressures remain stronger than expected, the OCR is expected to increase further.

Loan to Value Ratio Statistics- A Quick Look

As per RBNZ, the total monthly new mortgage commitments stood at $5.8 billion in the month of October 2023, reflecting a rise of 11.2% from $5.2 billion in September. The seasonally adjusted value increased by 2.2% from September. Annually, the value of new commitments witnessed a rise of 3.5% from $5.6 billion in October 2022. This was primarily because of 12.3% rise in lending to first home buyers as well as 13.0% growth in lending to investors.

In contrast, lending to other owner occupiers witnessed a fall of 2.5% from October 2022. The share of new mortgage commitments to first home buyers declined to 23.7% in October, reflecting a fall from 24.1% in September but equal to the share in August. The share rose from 21.8% in October 2022.

The average new loan value throughout all the borrower types increased to $367,100 in October 2023, reflecting a rise of 5.8% from $347,000 in September. The first home buyers, other owner occupiers as well as investors all rose in the average value of loans from September 2023.

Exhibit 1: Total Lending (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 Created by Kalkine Group

Credit Card Summary

As per credit card summary release dated 21 November 2023 by RBNZ, the seasonally adjusted total billings in NZ stood at $4.4 Bn in the month of October 2023, reflecting a fall of 1.9% from $4.5 Bn in September 2023. The seasonally adjusted domestic billings on NZ issued cards stood at $3.9 billion in October 2023, down 1.8% from $4.0 billion in September 2023.

The overseas billings on New Zealand issued cards remained stable at $0.6 Bn, with annual increase of 15.1%. The billings on overseas issued cards utilised in New Zealand increased $50 million (or 10.3%) as compared to September 2023 to $0.5 billion.

Total credit limits stood at $21.1 Bn (not seasonally adjusted) in October 2023.

Exhibit 2: Domestic Billings (NZD Mn) (Credit Card Spending on Cards Issued in NZ)

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:

Reserve Bank of New Zealand stated that inflation remains too high as well as inflationary pressures are still emerging. Further slowdown in the spending growth is required in order to reduce demand towards the economy’s ability to supply goods and services, in order to make sure that consumer price inflation returns to the target range.

The global economic growth is below trend as increased interest rates are impacting the demand. The ease in global demand is placing downward pressure on NZ exports, as well as export revenues are lower than in the recent years.

Exhibit 3. Key Risks in Financial Sector:

Source: Analysis by Kalkine Group

Outlook:

The Monetary Policy Committee stated that monetary conditions are restricting spending as well as reducing the inflationary pressure. Notably, the supply constraints in the economy are easing and demand growth has been slowing, but to the lesser extent than the expectations.

Over the recent quarters, the economic strength has been mixed in NZ’s critical trading partners. The economic growth in the US as well as Australia remained resilient even though the interest rates have remained higher. In contrast, growth in Europe as well as China has been slower than forecasters’ expectations since the start of the year. The services exports, mainly in tourism and education, recovered significantly since the border reopened in 2022. RBNZ is maintaining the robust growth projection for services exports.

RBNZ is expecting that tourism exports would have recovered to ~90% of their pre-COVID-19 levels in inflation-adjusted terms over 2023/24 summer as well as would surpass pre-COVID-19 levels by the end of the projection.

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: Hold, Potential Upside: Low Double-Digit) (M-Cap: NZD 81.4 billion, Annual Dividend Yield (TTM)¹: 6.71%)

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 is broadly positive about the economic outlook over the next year and the bank is in a robust position to grow the business as well as support customers needing help. In coming years, WBC would continue to simplify by integrating technology in order to deal with complexity, cost as well as service issues from the past acquisitions, by merging and simplifying the bank’s technology stack, streamlining customer and origination channels and product systems.

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

Technical Overview:

WBC Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

On the daily chart, WBC’s stock prices are developing a symmetrical triangle pattern characterized by lower highs and higher lows, suggesting that the sideways period in the stock might continue to persist in the near future. Additionally, the momentum oscillator RSI (14-period) is hovering near the midpoint, providing further support for the above observation. Prices are fluctuating between its previous peak and trough, which might function as resistance and support levels for the stock. An important support level for the stock is placed at NZD 21.2, while key resistance level is located at NZD 25.5.

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 ‘Hold’ recommendation on the stock has been provided at the closing market price of NZD 23.200 per share, up by 2.43% as on 30 November 2023.

2) Barramundi Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 180.6 Mn, Annual Dividend Yield (TTM)¹: 8.65%)

Business Description:

Barramundi Limited (NZX: BRM) is a listed investment company that invests in growing Australian companies.

Outlook:

In October, Barramundi’s gross performance return was down -7.0% as well as the adjusted NAV return was down -7.1%. This compares to the S&P/ASX200 Index (70% hedged into NZ$) which was down by -3.3%. In FY 2023, the company performed well amidst the volatile year with markets being driven by the number of factors. The majority of the companies within Barramundi are posting robust earnings as well as the board is confident in the investment strategy and the medium to long-term resilience of the portfolio. There have been indicators about the high calibre businesses with strong competitive advantages, as well as sensible management teams.

Technical Overview:

Technical Commentary

While experiencing a downtrend, BRM’s stock prices are establishing multiple bottom divergences in relation to the relative strength indicator, anticipating for a potential minor rally. Additionally, the momentum oscillator RSI (14-period) is trading near its oversold region, adding more evidence for the mentioned recommendation. Prices are trading below both trend-following indicators 21-day and 50-day SMAs, which might serve as dynamic resistance levels for the stock; in contrast, the stock’s nearest round level may act as a sentimental support. A significant support level for the stock is positioned at NZD 0.59, while critical resistance level is located at NZD 0.72

Stock Recommendation

Considering the facts above, a ‘Buy’ recommendation on the stock has been provided at the closing market price of NZD 0.650 per share, up by 2.27% as on 30^th November 2023.

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 November 30, 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

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