Will Elevated Core Inflation Pressurize Financial Services Sector - 3 Stocks to Consider

I. Sector Landscape and Outlook

Annual Growth Continues in Total Funds Under Management

Exhibit 1: Trend in Total Funds Under Management in NZ ($bn)

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

Growth in Business Lending Surpassed Housing Lending

Exhibit 2: 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

Regulated Banks Continue to Enjoy Robust Liquidity Position

Index Performance:

The S&P/NZX All Financials Index generated a 5-year return of ~43.16% versus ~2.43% by the S&P/NZX 50 Index. Therefore, S&P/NZX All Financials Index overperformed S&P/NZX 50 Index by ~40.73% in 5-year.

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

Source: REFINITIV

Key Risks and Challenges:

The global equity indices fell from their high as increased interest rates reduced the discounted value of future earnings and weakened the growth outlook. Further, the risk aversion could persist if geopolitical tensions continue or the global growth prospect turns unfavourable. Inflation is alarming across major economies, pressuring regulatory authorities to implement stringent policies.

Exhibit 4. Key Risks in Financial Sector:

Source: Analysis by Kalkine Group

Outlook:

The economic growth prospect is expected to be feeble due to the fear of the spreading of Omicron and elevated crude oil prices pushing consumer price inflation to a new high. Financial market participants are adjusting to the pace of rising uncertainty due to constant monetary tightening measures by regulatory authorities to curb inflation. The NZ house prices have moderated slightly but remained high, increasing mortgage rates and the outlook for underlying demand and supply factors. Meanwhile, financial institutions’ resilience remained robust in the last 6-month despite rising interest rates, geopolitical risks, and COVID-19. The banks’ profitability recovered to pre-2020 levels, and insurers have retained high capital levels.

Apart from the sector-specific factors, we have also analysed three NZX-listed companies operating in the same sector. 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: NZ$76.01 billion, Annual Dividend Yield (TTM¹): 6.17%)

Business Description:

Westpac Banking Corporation (NZX: WBC) is one of four major banking organizations in Australia and one of the largest banks in New Zealand. The company offers consumer, business, institutional banking, and wealth management services.

Outlook:

The company expects the Australian economy to grow by 4.5% in 2022 but 2.5% in 2023. Credit growth is projected 5.7% in 2022 and 4.3% in 2023 and the demand for housing indicates signs of easing, and rising interest rates are projected to slow down the house prices. The core focus will be on delivering on plans and improving risk management capability and digitization process to improve customer journey, customer service, customer growth in core markets and resetting the cost base.

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

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation:

The stock has been valued using a P/B multiple-based illustrative relative valuation, and a target price so arrived reflects a rise of low double-digit (in % terms). In addition, a slight premium has been applied to P/B Multiple (NTM) (Peer Average), considering decent outlook and expectation of growth in financial market.

Considering the aforementioned factors, a ‘Buy’ recommendation has been given on the stock at the closing market price of $21.71 per share, up by ~0.32% as of 23 June 2022.

2) Heartland Group Holdings Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZ$1.13 billion, Annual Dividend Yield (TTM¹): 6.54%)

Business Description:

Heartland Group Holdings Limited (NZX: HGH) is a financial services group. In New Zealand, Heartland Bank Limited is a registered bank. Through Australian businesses, the company provides reverse mortgage loans and funding to small business and customer lending sectors.

Outlook:

The company anticipates growth in H2FY22 to slow in Motor and online Home Loans business due to CCCFA impact. Also, plans robust portfolio mix toward higher quality and lower risk assets to improve NIM in H2FY22. The digitalization and automation route are aimed to increase the ability to pass cost savings to customers at market-leading or competitive rates, hence, decreasing the CTI ratio. Heartland expects NPAT for FY22 to be within the guidance range of $93-$96 million.

On 1 June 2022, the company confirmed the acquisition of StockCo Holdings 2 Pty Ltd and StockCo Australia Management Pty Limited (together, StockCo Australia) on 31 May 2022 for total consideration of A$154.4 million.

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

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation:

The stock has been valued using P/B value per share based on relative valuation (on an illustrative basis), and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to the P/B value per share multiple (NTM) (Peer Average), considering the decent outlook and increased profitability and its strategic priorities towards expansion in Australia through potential acquisitions.

Considering the aforementioned factors, a ‘Buy’ recommendation has been given on the stock at the closing market price of $1.91 per share, down by ~1.55% as of 23 June 2022.

3) General Capital Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZ$10.42 million)

Business Description:

General Capital Limited (NZX: GEN) is a financial services group listed on the NZX. The shares can be traded through any NZX participant, many Investment Advisers in New Zealand, and International Stock Brokers and advisors with New Zealand associates.

Outlook

The company stated that the outlook is very positive, but the volatility will continue to drive markets. Notably, the company plans to focus on growth and profit.

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation:

Considering the aforementioned factors, a ‘Speculative Buy’ recommendation has been given on the stock at the closing market price of $0.049 per share, down by ~2.00% as of 23 June 2022.

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: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Note 3: 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 where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

Kalkine New Zealand Limited is authorised to provide general advice only. The information on this website does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.