Financial Services Roundup: Market Talk

0131 GMT – Suncorp’s successful reinsurance renewal and reiteration of its FY 2023 margin guidance of 10%-12% is likely to clear a major hurdle for investors,

UBS

analyst Scott Russell says in a research note. Still, the investment bank’s analysis finds that Suncorp’s FY 2023 catastrophe budget increase to A$1.16 billion seems to be on the light side if elevated weather activity persists. “We expect attritional home and motor claims inflation remains the number one swing factor in the near term,” UBS says. It maintains a buy rating on the stock, which is down 1.1% at A$10.90. ([email protected]) Corrections & Amplifications

0122 GMT – Suncorp said yesterday it has renewed its reinsurance program, increasing reinsurance retention, but analysts from

Morgan Stanley

reckon earnings volatility will still rise. In a research note, MS says the Australian insurer’s catastrophe budget has also increased, but adds that it looks like the budget still remains too low. MS notes the Bureau of Meteorology is predicting around a 50% chance of La Nina forming in late 2022. At the same time, MS estimates Suncorp’s FY 2023 underlying margin to be at the lower end of affirmed guidance of 10%-12%. ([email protected])

0117 GMT –

Commonwealth Bank of Australia

could potentially write down the value of its investment in Klarna Bank in FY 2022, say analysts from Morgan Stanley in a research note. According to recent media reports Klarna is likely to raise additional capital at a valuation of US$6.5 billion, which is significantly less than the US$46 billion it was valued at a year ago, the analysts note. While CBA hasn’t commented on the potential for a write-down, MS notes that CBA’s Klarna stake was valued at A$2.48 billion in 1H FY 2022, down from A$2.7 billion in FY 2021.([email protected])

0106 GMT – The potential in Australia for a shift in the deposit mix from low-cost transaction accounts back to higher-cost term deposits, along with an increase in TD rates relative to the cash rate, are likely headwinds for the country’s banks, say analysts from Morgan Stanley in a research note. Still, MS notes that rates for shorter-duration deposits have so far increased by less than the cash rate, supporting the outlook for margins in the near term. “While the major banks are now offering rates of less than 2% for terms of 11 months or more, their shorter duration TD rates have actually increased less than the cash rate,” says MS. “Given that the vast majority of TDs are 3-month or 6-month, this supports the near-term margin outlook.” ([email protected])

2341 GMT – Australian agricultural producers are still facing challenges from the current conditions in global trade, but exporters are adapting to barriers like trade tensions with China by finding alternative markets, says a report by Rural Bank, the specialist agribusiness division of

Bendigo and Adelaide Bank.

Rural Bank reckons that demand in Southeast Asia is likely to strengthen. Australia’s improving export volumes to Southeast Asia are expected to assist exporters due to forecast lower freight costs, it says. The interim Australia-India Economic Cooperation and Trade Agreement, signed in April, is also expected to improve access to the Indian market when the agreement comes into force likely later this year, Rural Bank adds.([email protected])

2333 GMT – Strong demand for Australian lamb from the U.S. and other smaller markers have driven increased export value for the agricultural commodity, says a report by Rural Bank, the specialist agribusiness division of Bendigo and Adelaide Bank. “Australian lamb exports are already on pace for a record year with export value tipping over $1 billion in the year-to-April, up 38 per cent from 2021,” says Rural Bank head of sales,

Andrew Smith.

Still, the report finds that lamb and mutton prices will decline through 2H but will remain above average, adding that sheep producers remain well positioned to increase production and capitalize on strong global demand.([email protected])

1206 GMT – The strong performance of energy stocks in 2022 is hurting European ESG funds, many of which have taken a beating this year, says

Citi’s

Kim Jensen in a note. Most sustainable funds underweight energy stocks compared with non-ESG equivalents, mainly because of the link between fossil fuels and climate change. So far in 2022, energy has been the strongest-performing sector by a large margin, Citi says, with the sector in Europe up 23% against a 12% fall in the market. Citi also notes that European ESG indexes have less exposure to value stocks –companies trading for relatively cheap valuations compared with their earnings potential– which means that ESG might outperform if there is a period of weaker value-stocks performance. ([email protected])

0940 GMT – The takeover of UK Power Networks, Britain’s largest electricity distribution company, has collapsed just after regulator Ofgem published its draft proposals for the sector, RBC Capital Markets says in a note. The watchdog last week proposed to cut allowed returns for electricity distribution companies in the 2023-28 period to a baseline Return on Equity ratio of 4.75% from 7.0%-7.4% currently, the bank notes. Ofgem had also proposed to cut UK Power Networks’s total expenditure allowance to GBP5.5 billion, 11% lower than the company’s business plans, RBC says. The Financial Times reports that the potential buying consortium walked away as current UKPN owner CKI Holdings tried to increase the price of the deal to reflect higher inflation. ([email protected])

0917 GMT –

H&T Group’s

continued impressive performance, as well as the GBP4.3 million acquisition of Swiss Time Services, should boost earnings forecasts, Shore Capital analyst Gary Greenwood says in a note. With the acquisition expected to be earnings enhancing immediately, and volumes at record levels, the pawnbroker’s momentum shows no signs of slowing down, Greenwood says, expecting Shore Capital’s 2022 earnings forecasts to rise by 15% to 20%. “H&T continues to trade well, and we believe the investment case for the stock is compelling in the current environment, with the cost-of-living crisis likely to support continued strong demand for pawnbroking services while a rising gold price is helping to support demand and margins in gold purchasing,” Shore says. Shore Capital has H&T as a house stock. Shares are up 3.6% at 333 pence. ([email protected])

0910 GMT – Hong Kong banks are set to gain from rising net-interest margins, driven by faster interest-rate increases in the city, Fitch Ratings says in a note. The effects of higher NIM should outweigh those of asset-quality deterioration and a potential slowdown in loan growth in the near term, the ratings firm says. Fitch forecasts the Fed to raise rates by 125bp in 2H and by another 50bp in 1Q 2023, noting that interest rates in Hong Kong move in tandem with U.S. rates. HSBC, Bank of China and

Hang Seng Bank

stand to benefit more as they have greater power to reprice interest-earning assets swiftly as rates rise, Fitch says.([email protected])