The shares of these wealth management platform providers fell 14% and 13.5%, respectively, following the release of an announcement out of the latter.
What was the announcement?
Netwealth announced that its agreement with Australia and New Zealand Banking GrpLtd (ASX: ANZ) in relation to the interest payable on the total pooled cash transaction account will be terminated in 12 months.
The agreement currently provides a margin of 95 basis points above the overnight cash rate.
While no comments were made in relation to why it was being terminated, it appears as though the bank felt this was a bit rich in the current environment.
Netwealth is now negotiating with ANZ and other banks on a new deposit arrangement to replace this one when it expires.
Is this bad news for HUB24 and Netwealth?
Analysts at Goldman Sachs appear to believe the selling on Thursday was a bit of an overreaction by investors.
While the broker acknowledges that the new terms will be less favourable and have an impact on earnings, that impact isn’t expected to be as great as their share price declines would indicate.
It also notes that it removes an element of uncertainty that has been hanging over both companies.
What did Goldman Sachs say?
Goldman said: “…domestic banks can raise retail term deposits in even the most competitive segments at around 30bps currently, and 3-5 year wholesale funding at around 50bps. As such NWL’s 95bps contract was becoming relatively expensive funding for ANZ, and in considering these spot datapoints plus a relationship overlay, we now assume NWL / HUB move to a cash rate+50bps arrangement in coming years. NWL’s announcement would suggest it is likely to maintain a similar model for cash balances, noting that it should recover c.40bps of recent spread compression as the cash rate recovers toward 50bps.”
“On balance, we downgrade EPS by 0%/-4%/-15% in FY21-FY23E for NWL, and -1%/-2%/-10% for HUB, where we expect HUB’s deposit contract should insulate earnings for a little longer than NWL’s.”
Is this a buying opportunity?
The broker has retained its neutral rating and reduced its price target on Netwealth’s shares to $15.18. This compares to the current Netwealth share price of $13.78.
Whereas for HUB24, it has retained its buy rating and trimmed its price target down to $24.58. This compares to the latest HUB24 share price of $20.85.
Goldman concluded: “Risk to cash balance earnings has been the key focus point for the market in recent months and, outside of valuation the only consistent concern most investors have had with the segment.”
“While the downgrades are not insignificant, the FUMA growth profile we envisage is strong enough such that we still model earnings growth in the periods where cash spreads reset. To this end, with the cash balance overhang (somewhat) addressed, we would expect the market to refocus on the medium term outlook for FUMA growth and margin optimisation, both of which remain encouraging.”