Bank stocks have plummeted around the globe thanks to the uncertainty caused by the collapse of Silicon Valley Bank and Signature Bank, followed by the takeover of Credit Suisse by UBS.
But not all banks are created equal. The big four ASX-listed banks - Commonwealth Bank of Australia (CBA), ANZ, National Australia Bank and Westpac - have all seen their share prices hammered.
Ratings agency S&P Global said in a note this week that the Australian banks were unlikely to encounter similar developments to those that have shaken the global industry.
“The recent collapse of Silicon Valley Bank and downgrade of First Republic Bank (both US-based regional banks) highlight the risks from an asset-liability mismatch and unstable deposits. In addition, the write-off of Additional Tier-1 (AT-1) capital instruments issued by Switzerland-based Credit Suisse has startled many market participants.
“Australian banks have different business models to these banks,” said Sharad Jain, a credit analyst at S&P Global Ratings.
“They are mainly focused on conventional banking and operate with sound funding and liquidity under prudential regulations. That places the industry adequately to weather the current market instability.”
Jain said Australian banks could navigate a short-term disruption in the financial markets triggered by the recent events.
But he warned that prolonged dislocation of financial markets would erode the banks’ earnings and pose risks to ratings on smaller institutions.
William Curtayne, portfolio manager at Milford Asset Management, said the decline in Aussie bank stocks had already started in February, with CBA warning that net interest margins had peaked.
Then came the jitters caused by the banking meltdown. CBA - Australia’s largest bank and owner of ASB in New Zealand - has fallen from A$111.15 on February 3 to A$96.34 on the ASX as of Wednesday. National Australia Bank, which owns the BNZ, hit A$32.06 on February 8 and closed on Wednesday at A$27.04.
Meanwhile, ANZ and Westpac, which are dual-listed on the ASX and NZX, have also declined markedly. Westpac peaked at $26.33 on February 8 and opened yesterday (subs note: Thursday) at $22.71. Meanwhile, ANZ also peaked on February 8 at $28.55 and opened yesterday (subs note: Thursday) at $24.38.
Curtayne said it had very little invested in Australian banks heading into this recent banking crisis.
“This was mainly due to a view that their earnings were near the peak of the cycle as the banks had begun to compete very aggressively on mortgages and deposits which is a headwind for their profits.”
He said given the large decline in their shares and a view that the major Australian banks are in a sound capital position, it had selectively purchased some Australian banks as valuations had become more attractive.
“However, as the competition among banks remains intense, these small purchases are more tactical in nature and not based on a significant bullish view on the sector.”
Given the negative headlines in recent weeks, investors could be forgiven for thinking the sharemarket has had a terrible start to the year.
But in reality, the NZX50 Index is set to end the first quarter of the year up by about 2.8 per cent. And it’s the third consecutive quarter of positive returns for the local bourse.
Mark Lister, investment director at Craigs Investment Partners, said the NZ market had started the year very well before the banking jitters hit and recent weeks had also been relatively solid.
The NZX50 peaked at the end of 2020 and had then fallen by about 22 per cent by midway through last year. Since then, said Lister, the market had rebounded by about 10 per cent. However, it’s still 13 per cent below the all-time high.
Lister said New Zealand corporate bonds had also had a very strong start to the year - up 2 to 3 per cent.
“They have had the best run we have seen in the last two years.” That will be good news for KiwiSaver investors who were hit by a double whammy last year when shares and bonds both fell in value.
But on a stock-by-stock basis there are still some very poor performers. Synlait Milk, which this week reported a huge slump in its first-half profit, has been the worst performer over the quarter, down by more than 40 per cent.
Retailer the Warehouse, which also reported a big slump in its net profit recently, was the second-worst performer while apple grower and exporter Scales Corporation was the third-worst, reflecting concerns for the company in the wake of Cyclone Gabrielle.
Lister said what was noticeable was that the bottom-performing stocks tended to be smaller, while bigger companies like Fisher & Paykel Healthcare, Auckland Airport and Mercury NZ feature in the top performers.
“Which is why the market overall looks quite good. A lot of the big players have actually performed quite well.”
Lister said the poor performers were facing specific challenges. On top of that was the overarching view that the economy was going to get tougher this year and that bigger companies were better able to weather that.
“I think investors genuinely have been much more comfortable to pass over small companies and stick to what they know.”
Forsyth Barr analysts have cut the target price on Mainfreight but remain upbeat on its potential with an outperform rating.
In a research note last week, Andy Bowley and Paul Koraua lowered the company’s target price from $90 to $84 to reflect lower earnings expectations.
Mainfreight enjoyed a strong uplift in its earnings during Covid due to much higher freight rates and higher demand amid supply chain shortages.
But that is now quickly unwinding, say the analysts: “... we expect a more challenging trading period through FY24. Group earnings should fall materially, and more so than current consensus expectations, despite management’s ability to soften the profit impact of falling freight rates by flexing staff bonuses.”
In particular, they pointed to stronger headwinds for Mainfreight’s air and ocean profits.
“A reasonable proportion of Mainfreight’s A&O [air and ocean] profits are leveraged to sea freight shipping rates. The speed of spot rate normalisation has been severe.
“While Mainfreight’s trade lane and contract rate exposure offers temporary respite, we now expect the freight rate benefit to unwind fully by 2H24.”
They also point to a trading update from Mainfreight in February which signalled a sharp decline in profit growth from its transport operations.
“While revenue growth remained strong, margin pressure from higher costs was evident.”
However, they said history suggested this would be a temporary hiccup that management could remedy relatively quickly through pricing, volume gain and/or capacity right-sizing.
They forecast net profit after tax of $416.6 million for the 2023 financial year, falling to $342.5m in FY24 before picking up again in FY25 to $373.4m.
While the near-term outlook appeared more challenging, they were upbeat on the company’s future, pointing to Mainfreight’s consistent ability to win new business, relatively defensive industry and management’s track record of always taking advantage of a downturn.
It’s not only the rocket that rises every time Rocket Lab undertakes a new launch, but the level of trading in its shares.
Megan Stals, market analyst at online trading platform Stake, said New Zealand investors had taken very close interest in recent launches, with big spikes in trading volume around both events as investors reacted to the company delivering successfully.
“We saw massive increases in trade volume around both the “Stronger Together” and “The Beat Goes On” launches, with thousands more buy orders in the 24 hours either side of each launch, when compared to the average number of daily trades.”
Stals said while Rocket Lab’s stock price has been trending down since the middle of January, some investors were looking to profit from the short-term share price bounce that often resulted from successful launches, as seen in the 10 per cent price increase in the 24 hours after Friday’s launch.
“In the same way investors show interest in a stock around its earnings results, RKLB’s launches are having the same effect.
“The company saw US$12 million in revenue off the back of two successful launches in Q4, so investors know that successful liftoffs mean revenue for the business. But in a market that is placing a big emphasis on the path to profitability, Rocket Lab’s long-term prospects will depend on delivering successful launches consistently.”
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