Weekly equities note
Written and accurate as at: Apr 07, 2017 Current Stats & Facts
It was a positive week for the market last week, with all sectors adding positive returns except for Materials which detracted modestly (-0.17%). The broad S&P/ASX 300 finished 1.9% higher in what was a reasonably quiet week. Despite the scarcity of news flow the market capped off its best week since the beginning of the year.
All “Big Four” banks pushed higher by between 1.5% (ANZ Banking Group (ANZ)) and 3.9% (NAB (NAB)), with the help of their recent out-of-cycle rate increases. Loan repricing has led analysts to revise upward earning expectations on the banks. Regional banks, such as Bank of Queensland (BOQ, 5.5%) which posted its half-year result last week in line with market expectations, also benefited from this rising interest rate tailwind.
The banks also garnered attention from the domestic regulator. On Friday, APRA strengthened its macro-prudential policies against the banks pointing to “an environment of heightened risks”. Whilst the market had been expecting this tightening for quite some time, the resulting policy was somewhat weaker than the market’s expectation. The new measures will limit the flow of new interest-only lending to 30% of the banks’ total new residential mortgage book, from the current ~40%. It also places internal limits on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80%, and ensures there is “strong scrutiny and justification of any instances” of interest-only at an LVR above 90%.
The 10% benchmark on the banks’ annual allowance for new loan growth was left intact, unlike many had anticipated, commenting that the threshold remains an appropriate constraint in the current environment. The banks were also urged to continue managing their lending “in such a manner so as to comfortably remain below the previously advised benchmark of 10 per cent growth”. Overall, we do not believe this will be detrimental to the banks’ earnings, as long as they keep their current pace of loan book expansion, alongside an improving margin on the loans. In the past few years, a shrinking margin has been putting constant pressure on their bottom-line, and as a result forcing banks to ramp up on loan growth. With the trend starting to revert in Australia, as evident recently, we contemplate a more promising outlook for the domestic banks in general.
Turning to retailers, we note many well-known names have been hurt in recent months over fears that Amazon is marching into the Australian retail market. These retailers recovered some lost ground last week and included Myer (MYR, +14.1%), Harvey Norman (HVN, +3.4%) as well as JB Hi-Fi (JBH, +2.2%). Myer’s share price soared after Solomon Lew swooped up almost 10% of the company holding in one transaction during the week. Despite this rally, we still believe there are significant structural issues within the department store, which will hold the stock back. On a more positive note, we believe JB Hi-Fi will continue to benefit from its competitive advantages domestically. From our perspective, the notion of Amazon quickly dominating the local competition is somewhat far-fetched at this early stage, and will more likely take years to materialise.
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