Australian Credit Monthly January 2017

Transcription

1 ? Australian Credit Monthly January 2017 Morningstar Credit Research 3 February 2017 John Likos, CFA Senior Credit Analyst, Australia john.likos@morningstar.com Government Bond & Money Markets Aside from Europe, global sovereign bond yields had a relatively muted month in January as financial markets awaited clarity from the incoming US Donald Trump led government. In the U.S., 10-year government bond yields widened 2 basis points during the month to 2.46%, while in Japan they widened 4 basis points to 0.08%. Domestically, the Australian 10-year government bond yield fell 4 basis points 2.72%, while the ASX Interbank Cash Rate Futures pared some of their aggressiveness in future cash rate moves to the upside, with the next move being speculated to be a 25 basis point move upwards around mid The RBA does not meet in January. Their next meeting is on February 7, European sovereign bond yields on the other hand appreciated sharply on signs of economic recovery. German 10-year government bond yields more than doubled, moving up 23 basis points to 0.43%, U.K. yields increased 18 basis points to 1.41%, Italian 10-year yields widened 44 basis points to 2.24% and in France 10-year yields widened 35 basis points to 1.05%. Greek yields also widened significantly during the month, increasing 71 basis points to 7.65% as questions surrounding their financial health returned to the headlines. Economic Data In seasonally adjusted terms, Australia recorded a record trade surplus of AUD 3.5 billion in December 2016, an increase of 72% on the surplus in November 2016 and ahead of market expectations. This was driven by higher commodity prices as well as increasing export volumes. In seasonally adjusted terms, building approvals dropped 1.2% in December, to 17,327 dwellings. The number of private sector house approvals dropped 1.6%, while apartment approvals increased 0.9%. Dwelling approvals decreased in trend terms, in New South Wales (6.3%), Queensland (5.0%), Australian Capital Territory (2.0%), South Australia (1.3%) and Western Australia (0.3%) but increased in Tasmania (3.8%), Victoria (1.5%) and the Northern Territory (1.4%). Retail sales rose 0.2% in November 2016, seasonally adjusted, following a rise of 0.5% in October There were rises in food retailing (0.4%), clothing, footwear and personal accessory retailing (1.7%) and household goods retailing (0.2%). There were falls in cafes, restaurants and takeaway food services (- 0.8%), department stores (-0.3%) and other retailing (-0.1%). In seasonally adjusted terms, there were rises in New South Wales (0.5%), Victoria (0.4%), Queensland (0.1%), Tasmania (0.1%) and the Northern Territory (0.3%). There were falls in Western Australia (-0.6%), South Australia (-0.4%) and the Australian Capital Territory (-0.1%).

2 Page 2 of 13 The seasonally adjusted unemployment rate increased by 0.1% to 5.8%, and the seasonally adjusted labour force participation rate increased by 0.1% to 64.7% in December. Seasonally adjusted employment increased by 13,500 persons. Full-time employment increased by 9,300, while part-time employment increased by 4,200. Since December 2015, seasonally adjusted full-time employment decreased by 34,000, while part-time employment increased by 125,500. The seasonally adjusted participation rate decreased by less than 0.1% to 60.9% in December Over the past 12 months, the employment to population ratio decreased by 0.4%. The Consumer Price Index (CPI) rose 0.5% in the December quarter 2016, and 1.5% through the year to December This follows a rise of 0.7% in the September quarter The most significant price rises this quarter were tobacco (+7.4%), automotive fuel (+6.7%) and restaurant meals (+1.1%). These rises are partially offset by falls in furnishings, household equipment and services (-0.8%) and communication (-0.8%). Vegetables rose 2.5% in the December quarter Adverse weather conditions in major growing areas over previous periods continue to impact supply for particular vegetables (potatoes, capsicums, broccoli and cauliflower). Offsetting these rises are price falls for salad vegetables, tomatoes, lettuce and celery. Vegetable prices have risen 12.5% through the year to December quarter US Credit Markets (Sourced from the US Morningstar team) Although US earnings reports have been generally been mixed and fourth-quarter GDP was reported to be below the average consensus estimate, investors have continued to bid up the prices of risk assets in anticipation of faster economic growth. Corporate credit spreads had been in a holding pattern since the beginning of the year and traded in a narrow range, but they broke through the tight end of that range last week. The average corporate credit spread of the Morningstar Corporate Bond Index, our proxy for the investment-grade bond market, tightened 1 basis point to 126 basis points last week. In the high-yield market, the credit spread of the Bank of America Merrill Lynch High Yield Master Index tightened 9 basis points to 393 basis points. The levels in the corporate bond markets are the tightest that credit spreads have registered since the fall of 2014 and are significantly tighter than their long-term averages. The average spread of the Morningstar Corporate Bond Index is 42 basis points tighter than its long-term average of 168 basis points since the end of The average spread of the Bank of America Merrill Lynch High Yield Master Index is currently 187 basis points tighter than its long-term average of 580 basis points since the end of As investors bid up the price of risk assets, the prices of U.S. Treasury bonds have been drifting lower, and the entire yield curve rose approximately 2 basis points last week. At current levels, interest rates are near or in some cases slightly above their highest levels since late 2014, when corporate credit spreads were at the same levels as now. As expectations for an acceleration in economic growth and rising inflation have driven the market since the U.S. presidential election, the demand for safe-haven assets has diminished.

3 Page 3 of 13 Robert Johnson, Morningstar, Inc. s director of economic analysis, forecasts an acceleration in inflation but cautions that economic growth in 2017 may not rise much above the current run rate. In his first quarter outlook, Johnson forecasts that inflation will continue to accelerate over the course of the year and the U.S. core inflation rate will rise to 2.4%-2.6% by the end of this year. He projects that real GDP for 2017 will average 1.75%-2%. Based on his analysis, Johnson expects that the interest rate on the 10- year Treasury bond has about 100 basis points further to rise this year and will end 2017 at approximately 3.50%. Although corporate credit spreads tightened over the course of last week, retail investors in openend funds followed the lead of exchange-traded funds investors from the prior week and pulled USD 1.5 billion out of high-yield open-end funds last week. Combined with the amount of withdrawals from ETFs, outflows from the high-yield asset class totaled USD 1.7 billion. Recommendation Changes since Last Month On 2 February, we downgraded CBAPD from Accumulate to Hold on valuation grounds. There was no change to our Medium security investment risk rating. On 3 February, we downgraded ANZHA from Accumulate to Hold on valuation grounds. There was no change to our Low security investment risk rating. New Issues, Maturities and Resets N/A. K

4 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Morningstar Credit Research 3 February 2017 Page 4 of 13 Appendix I: Chart Pack Exhibit 1: 90-Day Bank Bills vs Official Cash Rate Official Cash Rate 90-Day BBSW 6% 5% 4% 3% 2% 1% Source: Reserve Bank of Australia, Morningstar 0% Exhibit 2: Interest Rate Futures Implied Cash Rate as at 31 January 2017 Implied Yield Official Cash Rate 1.75% 1.50% 1.49% 1.49% 1.48% 1.47% 1.47% 1.46% 1.46% 1.47% 1.46% 1.50% 1.51% 1.52% 1.54% 1.57% 1.61% 1.64% 1.67% 1.67% 1.25% 1.00% 0.75% Source: Australian Securities Exchange

5 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Morningstar Credit Research 3 February 2017 Page 5 of 13 Exhibit 3: Money Market Curve Interest Rate Swaps (Years to Maturity on X-Axis) 31 January December % 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% Source: The Australian Financial Markets Association 0.0% Exhibit 4: Term Deposit Average "Special" Rate (All Terms) RBA Special Term Deposit Rate (all Maturities) RBA Average Term Deposit Rate (all Maturities) 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Source: Reserve Bank of Australia

6 Page 6 of 13 Exhibit 5: Bank Capital Securities Trading Margins (change on month) as at 31 January 2017 Source: Morningstar Average WBCPG WBCPF WBCPE WBCPD WBCPC WBCHB WBCHA NABP D NABP C NABP B NABP A NABHB NABHA CBA PE CBA PD CBA PC ANZPG ANZPF ANZPE ANZPD ANZPC ANZHA -0.38% -0.30% -0.09% -0.13% -0.04% -0.06% -0.01% 0.03% 0.06% 0.06% 0.04% 0.05% 0.11% 0.08% 0.16% 0.14% 0.18% 0.23% 0.28% 0.32% 0.58% 0.61% 0.65% % % % 0.0 0% 0.2 0% 0.4 0% 0.6 0% 0.8 0% Exhibit 6: Floating Rate Securities Trading Margins (change on month) as at 31 January 2017 Average TTSHA SUNP E SUNP D SUNP C RHCP A MQGPB MQGPA MBLP A IAGPD IANG GMPPA CWNHB CWNHA CTXHA AQHH A AMPH A AGLHA -0.65% -0.38% -0.32% -0.30% -0.10% 0.13% 0.38% 0.05% 0.08% 0.21% 0.36% 0.06% 0.17% 0.28% 0.09% 0.53% 0.67% 1.07% Source: Morningstar -0.80% % % % 0.0 0% 0.2 0% 0.4 0% 0.6 0% 0.8 0% 1.0 0% 1.2 0%

7 Mar 2010 Jun 2010 Sep 2010 Dec 2010 Mar 2011 Jun 2011 Sep 2011 Dec 2011 Mar 2012 Jun 2012 Sep 2012 Dec 2012 Mar 2013 Jun 2013 Sep 2013 Dec 2013 Mar 2014 Jun 2014 Sep 2014 Dec 2014 Mar 2015 Jun 2015 Sep 2015 Dec 2015 Mar 2016 Jun 2016 Sep 2016 Morningstar Credit Research 3 February 2017 Page 7 of 13 Exhibit 7: Australian Bank Capital Components Total Capital 16% Tier 1 Capital/Common Equity Tier 1 (from Mar-13) 14% 12% 10% 8% 6% 4% 2% 0% Source: The Australian Prudential Regulation Authority Exhibit 8: New Issuance Monitor Insurance Financial Corporate AUD million 4,500 4,000 Source: Morningstar 3,500 3,000 2,500 2,000 1,500 1, Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr

8 Jan-2010 Apr-2010 Jul-2010 Oct-2010 Jan-2011 Apr-2011 Jul-2011 Oct-2011 Jan-2012 Apr-2012 Jul-2012 Oct-2012 Jan-2013 Apr-2013 Jul-2013 Oct-2013 Jan-2014 Apr-2014 Jul-2014 Oct-2014 Jan-2015 Apr-2015 Jul-2015 Oct-2015 Jan-2016 Apr-2016 Jul-2016 Oct-2016 Morningstar Credit Research 3 February 2017 Page 8 of 13 Exhibit 9: Non-Financial Spread to Swap Differential (RHS) Spread to Swap (5 year) Spread to Swap (10 year) Basis Points Source: Reserve Bank of Australia Exhibit 10: Major Bank Basel III Compliant Additional Tier 1 Trading Margins (Years to Call on X-Axis) 1 February November % 3.70% 3.50% 3.30% 3.10% 2.90% 2.70% 2.50%

9 Page 9 of 13 Appendix II: Security Recommendations as at 3 February 2017 Price Issuer Issue Years to Trading Running Yield Yield to Reset Distribution Ex ASX Code Recommendation (AUD) Size Reset Margin incl. fr excl. fr incl. fr excl. fr (AUD) Date AGLHA HOLD AGL % 5.46% 5.46% 3.70% 3.70% /02/17 AMPHA REDUCE AMP % 4.39% 4.39% 3.08% 3.08% /03/17 ANZHA HOLD ANZ 1, % 4.57% 4.57% 2.97% 2.97% /03/17 ANZPC HOLD ANZ 1, % 5.14% 3.60% 3.77% 1.11% /02/17 ANZPD HOLD ANZ 1, % 5.53% 3.87% 5.70% 3.86% /02/17 ANZPE ACCUMULATE ANZ 1, % 5.44% 3.81% 5.78% 4.02% /03/17 ANZPF HOLD ANZ % 5.77% 4.04% 5.96% 4.11% /03/17 ANZPG REDUCE ANZ 1, % 6.47% 4.53% 6.16% 4.13% /03/17 AQHHA HOLD APA % 6.25% 6.25% 3.83% 3.83% /03/17 CBAPC HOLD CBA 2, % 5.57% 3.90% 4.38% 2.56% /03/17 CBAPD HOLD CBA 3, % 4.91% 3.43% 5.70% 4.20% /03/17 CBAPE REDUCE CBA 1, % 6.75% 4.72% 5.62% 3.46% /03/17 CNGHA HOLD CBA 1, % 5.09% 5.09% 0.44% 0.44% /03/17 CTXHA HOLD CTX % 6.32% 6.32% 3.44% 3.44% /03/17 CWNHA HOLD CWN % 6.85% 6.85% 5.88% 5.88% /03/17 CWNHB HOLD CWN % 6.28% 6.28% 7.51% 7.51% /03/17 GMPPA ACCUMULATE GMG % 5.72% 5.72% 3.67% 3.67% /12/16 IAGPC HOLD IAG % 6.04% 4.23% 1.50% -2.13% /04/17 IANG ACCUMULATE IAG % 5.73% 4.01% 4.74% 2.90% /03/17 IAGPD HOLD IAG % 6.43% 4.50% 6.01% 3.98% /03/17 MBLHB HOLD MQG % 4.97% 4.97% /03/17 MBLPA ACCUMULATE MQG % 5.41% 4.76% 5.57% 4.83% /03/17 MQGPA ACCUMULATE MQG % 5.99% 5.27% 4.54% 3.73% /11/16 MQGPB HOLD MQG % 7.02% 6.18% 6.19% 5.24% /03/17 NABHA HOLD NAB 2, % 4.23% 4.23% /01/17 NABHB ACCUMULATE NAB 1, % 4.57% 4.57% 2.73% 2.73% /03/17 NABPA ACCUMULATE NAB 1, % 5.06% 3.54% 4.86% 3.24% /03/17 NABPB ACCUMULATE NAB 1, % 5.16% 3.61% 5.28% 3.66% /02/17 NABPC ACCUMULATE NAB 1, % 5.37% 3.76% 5.32% 3.63% /03/17 NABPD HOLD NAB 1, % 6.64% 4.64% 6.00% 3.92% /03/17 RHCPA HOLD RHC % 6.73% 4.71% /03/17 SUNPC ACCUMULATE SUN % 6.44% 4.51% 3.93% 1.69% /03/17 SUNPD HOLD SUN % 4.62% 4.62% 3.58% 3.58% /02/17 SUNPE HOLD SUN % 5.29% 3.71% 5.34% 3.66% /03/17 TAHHB HOLD TAH % 5.87% 5.87% 1.77% 1.77% /03/17 TTSHA HOLD TTS % 4.79% 4.79% 3.35% 3.35% /03/17 WBCHA HOLD WBC 1, % 4.56% 4.56% 2.97% 2.97% /02/17 WBCHB HOLD WBC % 4.12% 4.12% 3.78% 3.78% /02/17 WBCPC HOLD WBC 1, % 5.28% 3.70% 4.51% 2.44% /03/17 WBCPD ACCUMULATE WBC 1, % 5.04% 3.53% 4.73% 3.08% /02/17 WBCPE REDUCE WBC 1, % 5.01% 3.51% 5.32% 3.77% /03/17 WBCPF ACCUMULATE WBC 1, % 5.78% 4.05% 5.31% 3.49% /03/17 WBCPG HOLD WBC 1, % 6.59% 4.61% 5.87% 3.80% /03/17

10 Page 10 of 13 Appendix III: Exchange-Traded Australian Government Bonds at 31 January 2017 ASX Code Price Coupon Ex-date Payment Date Running Yield Yield to Maturity Maturity GSBM % 7-Dec-17 21/07/ % 1.52% 21-Jul-17 GSBA % 7-Dec-17 21/07/ % 1.79% 21-Jan-18 GSBS % 4-Dec-17 21/04/ % 1.79% 21-Oct-18 GSBE % 3-Jun-17 15/03/ % 1.72% 15-Mar-19 GSBS % 4-Dec-17 21/04/ % 1.88% 21-Oct-19 GSBG % 4-Jun-17 18/04/ % 1.94% 15-Apr-20 GSBI % 5-Apr-17 15/05/ % 2.12% 15-May-21 GSBM % 7-Jun-17 17/07/ % 2.17% 15-Jul-22 GSBG % 4-Dec-17 21/04/ % 2.38% 21-Apr-23 GSBG % 4-Dec-17 21/04/ % 2.51% 21-Apr-24 GSBG % 4-Dec-17 21/04/ % 2.60% 21-Apr-25 GSBG % 4-Dec-17 21/04/ % 2.63% 21-Apr-26 GSBG % 4-Dec-17 21/04/ % 2.72% 21-Apr-27 GSBG % 4-Dec-17 21/04/ % 2.92% 21-Apr-29 GSBG % 4-Dec-17 21/04/ % 3.17% 21-Apr-33 GSBG % 4-Dec-17 21/04/ % 3.46% 21-Apr-37 GSBK % 6-Sep-17 21/06/ % 3.55% 21-Jun-39 GSBE % 3-Oct-17 21/03/ % 3.78% 21-Mar-47 Exhibit 10: Exchange-Traded Government Bond Yield Curve Yield to Maturity 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% Source: Australian Securities Exchange, 0.0% Term to Maturity

11 Page 11 of 13 Appendix IV: Exchange-Traded Treasury Indexed Bonds (etib) at 31 January 2017 ASX Code Price Coupon Ex-date Payment Date Running Yield Yield to Maturity Maturity GSIU % 2-Oct-17 21/02/ % 0.32% 21-Nov-18 GSIO % 2-Sep-17 20/02/ % 0.32% 20-Aug-20 GSIC % 2-Oct-17 21/02/ % 0.46% 21-Feb-22 GSIQ % 3-Sep-17 20/03/ % 0.50% 20-Sep-25 GSIQ % 3-Sep-17 20/03/ % 0.98% 20-Sep-30 GSIO % 2-Oct-17 21/02/ % 1.22% 21-Aug-35 GSIO % 2-Oct-17 21/02/ % 1.23% 21-Aug-40 Exhibit 11: Exchange-Traded Treasury Indexed Bond Yield Curve Yield to Maturity 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% Source: Australian Securities Exchange, Morningstar 0.0% Term to Maturity

12 Page 12 of 13 Glossary of Terms BBSW Conversion Conversion Discount Conversion Number Convexity Cumulative Dividend Yield Duration Exchange Face Value Gross Margin Market Rate Mandatory Conversion Net Reference Rate Reset The Bank Bill Swap Rate (BBSW) is the average mid-rate for Australian dollar bills of exchange accepted by an approved bank, having a tenor with a designated maturity that appears on an approved information vendor's service (e.g., Reuters Screen BBSW page). Under certain circumstances, the hybrid security may be converted into a number of ordinary shares of the underlying stock at a specified conversion number, subject to terms, conditions and corporate events, including conversion discount, conversion date and triggers. A discount in percentage applied to the underlying stock price into which the hybrid security may be converted. Also referred to as exchange discount. The number of ordinary shares of the underlying stock into which the hybrid security may be able to convert. For certain hybrid securities, there may be a minimum and/or a maximum conversion number applied. The conversion number is generally calculated based on a formula: Conversion Number = Face Value / [VWAP x (1 Conversion Discount)] A measure for bonds used in conjunction with modified duration in order to measure how the bond's price will change as interest rates change. It is equal to the opposite of the second derivative of the bond's price relative to its yield, divided by its price. For example, since a non-callable bond's duration usually increases as interest rates decrease, its convexity is positive. Depending on the hybrid security, the dividend, distribution or coupon paid may or may not be cumulative. If the dividend, distribution or coupon is cumulative and if the issuer defers the payment of the dividend, distribution or coupon on any payment date, then additional dividend, distribution or coupon will accrue at the prevailing distribution rate. Expressed as a percentage, dividend yield is the company's annual dividend payments divided by its market cap, or the dividend per share divided by price per share. The change in the value of a fixed-income security that will result from a 1% change in interest rates. Duration is stated in years. For example, a five-year duration means the bond will decrease in value by 5% if interest rates rise 1% and will increase in value by 5% if interest rates fall 1%. Duration is a weighted measure of the length of time the bond will pay out. Exchange means the conversion, redemption, buy-back or cancellation of the hybrid security. The face value of the security is the issue price typically being AUD 100 per security. Yield expressed, inclusive of any available franking credits or tax-deferred benefits. Expressed as a percentage per annum, the margin offered by the hybrid security over a reference rate. The initial margin is typically determined by a bidding process within a prescribed margin range known as bookbuild. For certain hybrid securities, the margin may be increased (refer to Stepup) at a predetermined date. See Reference Rate. Some securities include a mandatory conversion condition, which forces conversion if the underlying stock price is above some threshold level and the issuer chooses not to redeem the security for face value. Yield expressed, exclusive of any available franking credits or tax-deferred benefits. Typically, a floating reference rate (e.g., 90-day BBSW) used to reference the periodic coupon payment of a hybrid security. The reference rate is generally applied at the beginning of a distribution period for the upcoming distribution. Also, referred to as the market rate. For certain hybrid securities, on a reset date, the issuer may reset certain terms including the next reset date, the dividend/distribution rate, the conversion discount and the timing of frequency of dividend/distribution payments. Resets may mean significant change to the terms of the hybrid security and as a result, investors may or may not accept such new terms. Further, the issuer may elect to redeem or to exchange the hybrid security. As such, Morningstar has a conservative approach to treating resets and considers it as a probable maturity. In tables and abbreviations, we use "Reset" to refer to any step-up, mandatory conversion, call or other pseudo-maturity event. Running Yield The hybrid's annual coupon payments expressed as a percentage of the market value of the security. Step-up For certain hybrid securities, the margin above the reference rate may be increased or stepped-up at a predetermined date upon the occurrence or non-occurrence of a certain event (e.g., non-conversion at a specified date).

13 Page 13 of 13 Tax Deferred Time to Maturity/Reset Trading Margin VWAP Volatility Yield to Reset/Maturity (YTR/YTM) The distribution of certain hybrid securities may have a tax-deferred component (may be less than 100%), which allows the distributions to be tax deferred over a certain period. The tax-deferred distributions are not assessable to Australian income tax upon receipt for most investors, but instead reduce the cost base of the security for capital gains tax purposes and as a result defer tax until the disposal of the security. Securities offering a tax-deferred component may give rise to tax benefits. Changes to tax legislation may have the effect of reducing the tax-deferred component of distributions. Investors should seek professional taxation advice in relation to dealing in these securities and their individual situation. The time expressed in number of years from now to a reset date, conversion date, step-up date and/or maturity date, where on such date, either the terms of the security may change or the security may be repurchased, redeemed, exchanged or converted. In simple terms if an issuer already had securities on issue, they could expect any new securities with $100 face value to trade close to the trading margin. The Trading Margin of a security s is the effective margin at which s trades; it is the margin which a new security n with face value of AUD 100 would need so the sum of the discounted cash flow of n equal the discounted cash flow of s assuming redemption of both s and n at the pseudo-maturity date of s. The calculation is grossed up for franking where appropriate. The average of the daily volume weighted average sale price of ordinary shares sold on ASX during the relevant period subject to specific terms and adjustments of the relevant hybrid security offer. The degree to which the price of a security tends to fluctuate. The hybrid's internal rate of return to reset, step-up or other pseudo-maturity event.