Financial Services - Platforms: Changes to cash come through
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Date posted:
- 25 March 2021, 3:00 PM
- Sectors Covered:
- Contractors/Developers, Diversified Financials
- Netwealth Group (ASX:NWL) announced that Australia and New Zealand Banking Group (ASX:ANZ) has provided the 12-month notice period to terminate the current pooled cash deposit arrangements. Current rates will continue until Mar-22.
- ANZ terminating the agreement is not unexpected, however no new terms have been agreed which infers ANZ is looking for a significant change in the rate provided. Near-term earnings uncertainty/risk will continue until NWL finalise new arrangements. NWL stated they are in negotiation with ANZ and other banks.
- We factor in a 30bp reduction in the deposit rate for both groups (included in HUB24 (ASX:HUB) forecasts prior to today). All else equal, every 10bps move from our assumption impacts FY23 EPS by ~4% for NWL and ~5% for HUB (full year basis for HUB, however noting HUB is contracted to 1H23 end).
- Whilst there remains uncertainty and risk until the revenue impact is known, we believe both groups will continue to gain significant market share and deliver ongoing long-term growth. We retain an Add on HUB.
ANZ gives 12-months’ notice on pooled cash arrangements
NWL announced that its current pooled cash arrangement will terminate on 24 March 2022. NWL currently receives a deposit rate of 95bp over the RBA cash rate (105bp total).
NWL stated that they are in negotiations with ANZ and other banks to establish an alternative facility and rate. ANZ is the primary banker to the sector and provides similar arrangements to most specialist platforms.
Retail term deposit rates provide some form of proxy
We have tracked the differential between the ANZ 12-month term deposit rate and the rate achieved by the platforms for some time (see overleaf). This differential has widened by ~70bp since April-20, equating to cost of funds pressure for ANZ.
We see retail term deposit rates as a fair proxy for the current rates the major banks would be looking to provide the platforms (ignoring any long-term relationship/funding advantages): which range from 30bp (ANZ 12-mth rate) to 50bp from other major banks (and up to 75bps for online/non-tier 1 banks).
Based on term deposit rates, we expect ANZ is looking for a significant reduction in the rate provided.
Forecasts: more sensitivity for HUB, but previously factored in
We estimate pooled cash revenue was ~23% of group revenue in 1H21 dropping to ~19% in 2H21 (post the Nov-20 RBA rate cut).
We have factored in a 30bp decline in the pooled cash ‘take rate’ from 4QFY22 (effective 75bp margin), and then a 10bp improvement from this level from 1H25. This leads to a 10% FY23 EPS downgrade.
NWL’s estimated earnings sensitivity (FY23) to the deposit rate is now a ~4.1% EPS move for every 10bp change in the assumed deposit rate achieved.
We estimate pooled cash revenue was ~21.5% of group revenue in 1H21. HUB has a similar contract with ANZ which runs to Dec-22 and we assume achieves ~90bp over the cash rate (100bp total).
We have previously factored in a 30bp decline in the pooled cash rate from 2H23 (effective ~70bp margin) which is unchanged, and a 10bp improvement from this level from 1H25.
We downgrade FY22/23 EPS by ~5% (higher revenue margin compression vs previous assumption). HUB’s earnings sensitivity to the deposit rate is now a ~5.2% EPS move for every 10bp change in the assumed deposit rate achieved.
Recommendations remain unchanged: NWL Hold, HUB Add
Whilst there remains uncertainty around the outcome for pooled cash earnings, we believe we have largely reflected the short term impact in our forecast.
Ultimately, if the final outcome is worse than expectations, we think both groups can absorb the impact and still deliver substantial growth on a long-term view.
We retain an Add recommendation on HUB as we believe the business can deliver scale efficiencies over the next three years which should result in a material earnings step-up.
We view NWL as a high quality business, however trading closer to fair value vs HUB. The largest risk to both groups is a greater than expected earnings impact from changes to pooled cash deposit rates and/or a lower RBA cash rate.
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