While the Aussie economy is undergoing a challenging period, the banking and wider finance sector continues to offer superb opportunities. A key reason for this is the potential for an even looser monetary policy, with the RBA set to reduce interest rates further during the course of the year.
The effects of this should be to increase demand for new loans (since the cost of servicing debts will fall), while also reducing the volume of bad loans, as consumers and businesses find it easier to make their repayments due to a lower interest rate. Both of these factors should, in turn, improve the outlook for the ASX and the wider economy.
As such, financial stocks could see their bottom lines improve and, while there is still scope for further commodity price falls to hurt unemployment and the wider macroeconomic outlook, sufficient margins of safety appear to be on offer in these 3 financial companies which appear to be worth buying right now.
Commonwealth Bank of Australia
Despite posting gains of 55% in the last five years, shares in Commonwealth Bank of Australia (ASX: CBA) continue to yield 4.6%. This could catalyse investor sentiment over the medium term – especially with interest rates set to fall further and dividends likely to become increasingly important for income-seeking investors.
Furthermore, CBA's bottom line is set to grow at an annualised rate of 6.9% during the next two years. This is roughly in-line with the bank's growth rate over the last ten years, where it has risen by 6.4% per annum, and highlights the consistency that its size and scale offers investors over a long time period.
And, with CBA having a price to earnings (P/E) ratio of 16, it continues to trade at a discount to the ASX, with the wider index having a rating of 16.6 at the present time.
Insurance Australia Group Ltd
In the short run, the share price of Insurance Australia Group Ltd (ASX: IAG) could come under pressure as a result of the cost of the storms in New South Wales. In fact, over 10,000 claims have been received, which is likely to hurt IAG's profitability in the short term.
Of course, IAG's bottom line is already forecast to fall by 15% in the current year, before rebounding with 2.3% growth next year. That's a key reason why IAG offers such good value at the present time, with its shares trading on a P/E ratio of just 12, which is considerably lower than the wider insurance sector P/E ratio of 19.5.
And, with a yield of 6.3% and a beta of just 0.59, IAG remains an excellent defensive stock which looks set to beat the ASX over the medium term – just as it has done over the last five years, with IAG's shares up 55% versus 19% for the wider index.
FlexiGroup Limited
Consumer finance company, FlexiGroup Limited (ASX: FXL), is forecast to increase its bottom line by 9.4% per annum during the next two years and trades on a P/E ratio of just 11.4. This equates to a price to earnings growth (PEG) ratio of only 1.21, which is significantly lower than the ASX's PEG ratio of 2.33.
Of course, FlexiGroup has an excellent track record of growth, too, with cash flow per share rising at an annualised rate of 24.6% during the last ten years. This has clearly made its financial standing much stronger, and has allowed it to increase dividends per share by 22.6% per annum during the same time period, which puts FlexiGroup on a yield of 5% at the present time.
And, with dividends per share expected to grow by 7.8% per annum in the next two years, FlexiGroup could be yielding as much as 5.7% in financial year 2016.
