Investment view
Slower household credit growth to weigh on the share price. We see the risk of a more aggressive slowing of home lending growth over 2022-24E, relative to the market’s current assumption of +4% pa. This is due to; 1) rises in RBA cash rates; 2) falling house prices and; 3) normalisation of COVID-induced demand for home lending.
Downside risk to BEN valuation multiples from a housing slow down. Earnings risks may take some time to manifest in BEN given the strength of household balance sheets. We see the key issue as a slowing of growth, rather than an emerging bad debts issue This leaves the PER vulnerable.
In prior rate hiking cycles, BEN’s PER fell as cash rates were hiked. BEN PER in prior cycles has bottomed at 9-10x. Since the RBA’s May rate hike, BEN PER has fallen from 13.5x to 11.0x (on unchanged earnings). With RBA likely to aggressively hike interest rates through 2022, this is likely to keep pressure on BEN’s PER multiple.
Consensus earnings recovery looks aggressive. In periods where RBA interest rates have risen, BEN asset growth has slowed, falling on average to an annualised rate of 0% (currently 12% April yoy). We are increasingly concerned that the market is yet to factor in a credit growth slowdown for BEN. Flat lending growth into FY24E would pose downside risks to consensus earnings and the share price.
Regional banks will find it more difficult to recapture margin. Regional banks are not as well placed as the majors to recapture margins over the coming years as the major banks due their competitive position. Without margin improvement, earnings growth will be more challenged given slowing credit growth and rising cost pressures (labour). A further reason why we see BEN valuation multiple as being vulnerable to a further de-rating.
Slower revenue growth will expose BEN’s low return on equity. Regional banks have found it challenging to generate a positive return on equity above their cost of equity. In a tougher environment for lending growth, this issue is likely to resurface with investors. From a relative standpoint, the major banks are likely to be able to continue to return capital over 2023/24 which will only further highlight the low return on equity of BEN.
Sell recommendation, look to revisit in the low to mid $7.00. Rising interest rates, slowing credit growth and falling house prices will make life difficult for BEN share price. A 9-10x PER implies low-mid $7.00, representing a trough cycle valuation and share price.
Risks to investment view
Upside risks relate to mortgage repricing and stronger than expected levels of credit growth.
Key downside risks include further deterioration in interest margins, intensifying lending competition, material slowing in credit growth, and delayed resumption of dividend growth. A significant and rapid fall in house prices driven by higher interest rates would present a risk to the share price.
