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Reporting season preview: Financial services

Richard Coles

  • Entering the reporting season, our Insurance/Diversified Financials Add calls (in order of preference) are:
    • Link Administration Holdings (LNK)
    • Suncorp Group (SUN)
    • QBE Insurance (QBE)
    • NIB Holdings (NHF)
  • We have a Reduce recommendation on the ASX, and Hold calls on the remaining stocks.
  • Of the stocks yet to pre-release result figures, we think the most interest lies with QBE which we expect to deliver a COR inside its target range.
  • While we expect CPU to reaffirm FY19 guidance (+10% EPS growth on pcp), recent market volatility is likely creating some headwinds.
  • On AMP and CGF, recent downgrades pose significant questions about their underlying earnings trends, making this the key focus of both results, in our view.

General insurers – focus on QBE

We expect QBE will deliver a broadly solid FY18 underlying result, marking a positive first year in charge for CEO Pat Regan. While 4Q18 market volatility creates some downside risk to QBE's investment income guidance (2.25%-2.75% ex the discount rate adjustment), we think QBE's FY18 combined operating ratio will be comfortably inside management's guidance range (95%-97% ex DRA).

For Insurance Australia (IAG) and SUN, who have largely pre-announced 1H19 insurance claims, both insurers face the risk of exceeding full year hazard allowances in 2H19, in our view.

We think SUN is the more likely here (even if weather normalises) maybe by A$50m-A$100m.

Expecting solid underlying PHI results, but with some mark to market impacts

The favourable trend of low hospital claims utilisation, which has assisted the Private Health Insurers (PHIs) in recent periods, appears to have continued in 1H19.

This should support solid underlying results for both Medibank Private (MPL) and NHF, with a further NHF UOP guidance upgrade likely in our view (although this is largely factored into consensus).

At the reported profit line, however, recent falls in equities markets (down ~10% over 1H19) will have a large negative impact for both insurers. This is highlighted by our MPL 1H19 investment income forecast being A$8m versus A$59m in the pcp.

Computershare – likely some growing headwinds

We think 4QCY18 market volatility/Brexit impacts will have created some headwinds for CPU, at the very least through a more subdued corporate actions environment.

At this stage, however, we see risks to guidance as somewhat contained with management confidently reaffirming FY19 guidance (management EPS +10%) at the AGM in late November.

On this, we do think current CPU management have proved themselves relatively conservative in setting market expectations (two upgrades in FY18), and we note FY19 guidance did already factor in slightly lower corporate actions/event-based activity than FY18.

AMP and CGF – the key focus is on underlying earnings trends

While acknowledging both the recent AMP Limited (AMP) and Challenger Limited (CGF) downgrades had some hallmarks of a new CEO rebasing, we do think significant questions exist about the underlying earnings trends of both companies.

For AMP, while recently sold businesses were a key driver of its weak 2H18 performance, the 2H18 operating earnings of retained businesses (A$325m) were also 10% below our expectations. While for CGF, we think it remains hard to reconcile the size of its FY19 downgrade against disclosed 1H19 market volatility impacts.

More information

Morgans clients can login to view our detailed report 'Financial Services - Overall', which includes price targets. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.