Things to watch in banking and FUM space - CBA and MFG under Spotlight

Summary

• Mortgage lending could drop with a probability of rise in defaults due to risks of high unemployment and end of fiscal support.
• Commonwealth Bank is the only one out of four big banks (NAB, WBC and ANZ) to not cut dividend for 6 months period and paid the amount in March. Its shares provided a positive return of more than 30%, as on 7 July, post hitting a low price at $54.26 in March 2020.
• Magellan Group shares have given remarkable return 108%, as on 7 July after witnessing a plunge in March and reported average FUM at $95.5 billion for the year ended 30 June 2020, up by 26% on pcp.
• As per market experts, Australian FUM industry is expected to witness a growth of 3.3% in the next 12 months, which is likely to come from new assets of new clients.

COVID-19 has put massive challenges in front of the banking sector, and banks are at the forefront of economic disruption brought by the pandemic. They are in dire need of strengthening their operational resilience and maintain payment operations.

As per Australian Prudential Regulatory Authority (APRA) statistics, all big 4 Australian banks namely Commonwealth Bank of Australia (ASX:CBA), Westpac, Banking Corporation (ASX:WBC) National Australia Bank Limited (ASX:NAB) and Australia and New Zealand Banking Group Limited (ASX:ANZ) reckoned for about 80% of the residential loans and above 75% of the total commercial property loans for the January- March quarter period in the nation. However, mortgage loans declined 10.9% due to early changes in borrower behaviour amid coronavirus and also, housing market seasonality.

In its latest report, S&P Global stated that major banks in Australia might witness a plunge in mortgage lending and an increase in defaults due to slowdown of the economy and borrowers’ sentiment dwindling amid coronavirus.

Australia’s financial sector is the largest contributor to its economy. The nation is amongst the top pool of assets under management (AUM), internationally. Managed funds are a highly worthwhile form of investment for investors.

A leader in FUM space in the country, BetaShares’ ETF review stated that funds under management across ETF (exchange traded fund) have increased over 4% and was noted at $64 billion by the end of May.

Let’s have a look at drivers behind the rise in shares of Commonwealth Bank and Magellan group.

CBA shares provided positive return of 31.2% between 23 March to 7 July

Shares of Commonwealth Bank of Australia (ASX:CBA) have given a positive return of 31.2%, from hitting a low price of $54.26 on 23 March to close at $71.24 on 7 July.

Recently, ASX has been rallying primarily led by the emerging tech giants with 2 banks- WBC and CBA, amongst the big 4, that have been making substantial profits. CBA has had a robust balance sheet with a high capital amid COVID-19.

Also, Commonwealth Bank was the only bank amongst the big 4 (ANZ, NAB and WBC) that did not cut its dividend. The bank was able to pay its HY20 dividend of $2 (for the period closed 31 December, last year) in March this year.

The spending on credit and debit cards picked up momentum in June. As per Commonwealth Bank statistics, card spending for the week to 3 July rose 12.1% compared to 2019 and showed a rise of 4.5% over the previous week. While online spending increased by 16.7%, in-store spending rose 9.9% over the period. This reflects a progressive pace of the economy since spending had fallen 20% in the week closed 10 April compared to the same week last year. However, there are signs of slowdown in momentum for the past few weeks, which is not good for banks.

CBA share prices are also dependent on the ongoing fiscal support by the Federal Government and temporary pause offered on mortgage repayments for 6 months. The government might withdraw JobKeeper and JobSeeker schemes in September, which could significantly affect consumer spending. There is a need to continue with the wage subsidy for some time to lift spending.

ALSO READ: Job Vacancies record the biggest fall while Job Subsidy nearing an end in Australia

Some of the macroeconomic factors that can rally CBA shares is the development of a vaccine. However, the overall economic picture of the economy remains dismal due to rising unemployment figures and job losses amid coronavirus induced recession in Australia. This puts CBA under the threat of mortgage stress in the coming months due to reduced ability of people to repay when September comes around.

Further, shareholders await CBA’s full year results to be published in August to see if the bank would cut its dividend/distribution or not.

On 8 July 2020, CBA last traded at $70.56, declining by 0.955% compared to its last close.

Magellan Financial Group shares draw attention

Magellan Financial Group Limited (ASX:MFG), a fund manager that invests in global equities and infrastructure, shares have given positive return of 108.16% from a low price of $30.75 on 23 March to ending at $64.01 on 7 July.

As per the Group’s update on 4 June 2020, it has nearly $2.5 billion in funds under management and above 35,000 unitholders. For the half-year to 31 December 2019, MFG recorded adjusted net profit after tax of $216.8 million, up by 23% on pcp and interim dividend stood at 92.9 cents per share, up 26% on pcp.

On 7 July, MFG announced the details of funds under management (FUM). The Group reported that average FUM rose 26% and stood at $95.5 billion for the year-ending 30 June 2020 compared to $75.8 billion for the prior corresponding period in 2019. The details revealed:

• Net fund inflow of $249 million which comprised of net retail inflows of $173 million and net institutional inflows of $76 million
• Expected payment of distributions of roughly $650 million in July
• MFG estimates performance fees of about $81 million for the year ended 30 June 2020

As updated on 4 June, MFG launched its fourth active ETF named The Airlie Australian Share Fund (AASF). It is the next generation of active ETFs that combine elements of both an unlisted fund and active ETF into a single unit in a single fund. It gives investors better flexibility and choice in the way they make an investment and bring efficiencies to fund managers. AASF has outperformed the market by 6.6% net of fees over 12 months until 31 May.

A high rate of unemployment may impair budgets of households. While withdrawal of government subsidies, as well as an end to the moratorium on loan repayments could trigger defaults, even more, putting high mortgage stress on banks. Further, as per market experts, Australians are expected to witness growth in AUM of 3.3% in the next 12 months period, with a growth rate of 15.7% (annually) across the next 3 years.