Last week, leaders of seven listed diversified financial services companies gathered in a conference room high above Sydney's Farrer Place to discuss their prospects with institutional investors.
What followed offered a unique opportunity to gauge the health of the Australian economy and, in particular, its once all-conquering financial services sector.
As John Lombard, the chief executive of the country's biggest listed accountancy network, WHK Group, said, Australia's financial services industry was facing what might be a perfect storm: volatile markets and a wave of new regulation.
Predictably, conditions in parts of Western Australia and Queensland were strong but confidence was low in the most populous states of Victoria and NSW. Any region exposed to tourism was "terrible".
One CEO said national business confidence was as low as it was in the early 1990s when unemployment peaked at 11.3 per cent and interest rates reached 18 per cent.
January and February may have performed to budget but March and April were tough months (should we be blaming events in Canberra?).
The chief executive of regional banking group Mystate, John Gilbert, said the nicest thing that could be said about the Tasmanian economy was it was not growing. Unemployment was 7.7 per cent and there was no obvious catalyst for a rebound.
The head of wealth management play Plan B, Andrew Black, noted fund flows into financial services firms were more likely to be from competitors than clients taking a more aggressive attitude towards risk.
All this means listed financial stocks are trading at record or near-record low forward earnings multiples.
The chief financial officer of life insurer ClearView, Athol Chiert, said shareholders were effectively being offered a free-option on growth, given the value of business already on the books.
The CFO of IOOF, David Coulter, said the tough conditions meant there were consolidation opportunities on offer for stronger companies. IOOF has no net debt and an enviable track record in mergers and acquisitions. Further deals could take place, for instance in distribution
Despite the gloom, there are pockets of growing organic demand.
The insurers, whether it be life insurance, health insurance or general insurance, are proving their resilience.
According to ClearView Wealth, the industry wide sale of life insurance products continues to move along at low double-digit levels.
The health insurer NIB points out it is inevitable that individuals will have to take greater responsibility for their health as governments are unable to maintain the current level of support.
A change of government could accelerate this trend.
The federal government is already spending 4 per cent of gross domestic product on health. This is expected to double as a proportion of gross domestic product by 2050.
Then there is the growing propensity towards discretionary spending on health. For instance: I am going to get my knee done to keep my (illusory) AFL dream alive.
After a string of natural catastrophes, general insurance minnow Calliden reports average annual home premiums have risen from $420 to $810 over the past four years. Further increases are planned for next month.
Despite this, policy retention remains high among home insurance customers. It seems that in tough economic times home owners are reluctant to relinquish their insurance.
No surprise then that Suncorp reported yesterday that its general insurance business had improved ahead of expectations in the second half of its financial year.
The general insurers from IAG and Suncorp through to Calliden are going to make money if conditions remain benign, even taking skyrocketing reinsurance costs into account.
Stewart Oldfield is an analyst at Investorfirst Securities.
soldfield@investorfirst.com.au
Frequently Asked Questions about this Article…
What is the current outlook for the Australian financial services sector and economy?
The investor briefing described a mixed outlook: parts of Western Australia and Queensland are strong, while confidence is low in Victoria and NSW and tourism-exposed regions are struggling. Leaders warned the sector faces a possible "perfect storm" of volatile markets and a wave of new regulation, which is weighing on business confidence and activity.
Why are listed financial stocks trading at low forward earnings multiples?
According to the briefing, tough trading conditions, weak business confidence and regulatory pressure have pushed listed financial stocks to record or near-record low forward earnings multiples. Executives noted that growth is uncertain even though some companies hold valuable existing business, which reduces near-term earnings expectations.
Are there merger and acquisition (M&A) opportunities among financial services companies?
Yes. The CFO of IOOF said current conditions create consolidation opportunities for stronger firms. IOOF was highlighted as having no net debt and a strong M&A track record, and further deals — for example in distribution — could be on offer for well-positioned companies.
How are insurers performing and which insurance segments are showing resilience?
Insurers across life, health and general insurance are showing resilience despite broader sector weakness. The article notes life insurance sales are continuing at low double-digit levels, health insurers see growing private responsibility for care, and general insurers like Suncorp and IAG (and smaller players such as Calliden) are improving results if conditions remain relatively benign.
How have home insurance premiums changed recently and what does that mean for customers?
After several natural catastrophes, Calliden reported average annual home premiums rose from $420 to $810 over four years, with further increases planned. Despite higher prices and rising reinsurance costs, policy retention among homeowners remains high, suggesting customers are reluctant to drop cover in tough economic times.
What is happening with fund flows into financial services firms?
The head of wealth manager Plan B, Andrew Black, said recent fund flows into financial services firms have tended to come from competitors rather than from clients taking on more investment risk. In other words, money is shifting between industry players rather than reflecting a broader uptick in client risk appetite.
How are regional economic differences affecting banks and regional firms like MyState?
Regional disparities matter: some states are performing well while others lag. MyState’s CEO, John Gilbert, said Tasmania is essentially not growing, with unemployment around 7.7% and no obvious catalyst for a rebound. That uneven economic picture is influencing regional banks and financial services exposed to local economies.
What trends are affecting health spending and the outlook for health insurers like NIB?
The briefing noted governments are already spending about 4% of GDP on health and that share is expected to double by 2050, implying greater pressure on public budgets. NIB highlighted that individuals will likely need to take more responsibility for health spending, and a change of government could accelerate that shift — creating longer-term demand opportunities for private health insurers.
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