Most analysis of life after Covid focuses on industries or trends. For example, an e-commerce boom that will last long after lockdowns, boosting multi-channel retailers.
Less considered is location. That is, markets that have better long-term prospects partly because of their geography. Queensland is an example.
I confess a home bias. I was born in Queensland and still consider it my home State (despite living in Melbourne for 18 years and Sydney for 12).
But it’s hard not to like the long-term outlook for leading Queensland-based stocks, such as Bank of Queensland and Suncorp.
Short term, Queensland’s success managing Covid is an advantage. Who knows if that’s due to good management (the State Government) or good luck (a warmer climate) – or a bit of both. The fact is, Queensland has not had nearly as many Covid problems as NSW and Victoria.
Of course, that could change. The Delta variant is unpredictable. But compare Queensland’s outlook to NSW, which faces months of an extended lockdown. Or that of Victoria, now in its fifth lockdown, including a brutal 111-day stretch last year.
Covid rattled business confidence in Victoria. How many small businesses there want to borrow money to grow when the State is in and out of lockdown? Sadly, staying alive is the focus for many hospitality businesses hurt by the latest Victorian lockdown.
I guess NSW will be the same. There’s no quick fix from extended lockdowns. Small-business confidence takes time to repair. That’s bad for credit growth and solvency.
Now, consider Queensland. Its economy has not been shuttered because of Covid outbreaks. When life returns to normal, population migration to Queensland will probably increase because more people will want to move to a warm climate with fewer Covid problems.
That should support higher property prices and business confidence in Queensland. That’s good for financial-services companies that benefit from stronger credit growth and fewer bad debts.
Longer term, Queensland’s hosting of the 2032 Olympics is great news, Yes, it’s a long way off and nobody would buy stocks because of that. But it adds to my view that Queensland will recover a little stronger after the pandemic than the southern states.
Yes, I know Queensland has plenty of work to do. But it was the best state for jobs growth in the latest CommSec State of the States report. On housing finance, which is critical for financial-services companies, Queensland ranked fourth (it was second in the previous report).
If I’m right, and Queensland performs relatively better during and after Covid than the southern states (because it had far less Covid), investors should look at Bank of Queensland and Suncorp. Both are obvious plays on the State’s economy.
1. Bank of Queensland (BOQ)
Readers will recall I turned bullish on bank stocks in April 2020 near the height of their sell off. It was a nerve-racking idea at the time, but the sector is up about 65% off its lows.
My preference was to “buy the sector” through the VanEck Vectors Bank Exchange Traded Fund (MVB) rather than pick banks stocks. In truth, I didn’t give BOQ or Bendigo and Adelaide Bank (BEN) enough thought at the time, although both are included in the VanEck ETF.
At a stock level, I favoured ANZ and Westpac Banking Corporation. ANZ has the highest one-year total return (including dividends), followed by Westpac, NAB and Commonwealth Bank. CBA has a far superior performance over three years.
BOQ is not cheap. Like other banks, it has rallied this year. It’s one-year total return of almost 60% is better than most ASX-listed bank stocks. But over three years, BOQ returned minus 1.4%, Morningstar data shows. It has much catching up to do.
Two factors underpin my interest in BOQ. First, the bank reported housing-loan growth of 1.6 times banking-system loan growth in its May investor presentation. In June, BOQ reduced its provision for impaired loans by $75 million because of Queensland’s improving economy.
That reinforces my view: BOQ should continue to have stronger loan growth and fewer bad debts thanks to the performance of Queensland’s housing market during and after Covid.
Second, BOQ in July completed its $1.3 billion acquisition of Members Equity (ME) Bank. I hate the cliche “game-changer”, which BOQ management used to describe the deal, but ME Bank is an excellent fit for BOQ and gives it firepower to take on the big-four banks.
Long-term investors should watch and wait for better value in BOQ. It looks fairly valued at the current price, but a weakness would be a buying opportunity. It should be on portfolio watchlists, in anticipation of a market pullback over the next few weeks or months, amid escalating Covid concerns and renewed talk of recession.
At $8.92, BOQ is expected to yield just above 7% in FY22 after full franking.
Chart 1: Bank of Queensland
Source: ASX
2. Suncorp Group (SUN)
The insurance/banking group has rallied from a 52-week low of $8.09 to $11.40. But over three years, Suncorp has a negative total return of -5.1% and a barely positive return over five years.
Suncorp is one of Australia’s largest general insurers. That division contributes about 71% of revenue, followed by the Banking division (14%) and Suncorp NZ (14%).
Suncorp has had its challenges in delivering sustainable growth. But its 10-year annualised return (10%) is much higher than QBE Insurance and slightly better than Insurance Australia Group.
I like Suncorp’s strategy to simplify the business through divestment of underperforming or non-core businesses. The most recent sale was its Australian wealth business. Suncorp looks more streamlined and better focused than it has in years.
Suncorp disclosed two key targets in its latest market update. In General Insurance, Suncorp wants an insurance margin of 10-12% by FY23. In banking, it wants a cost-to-income ratio of 50% by FY23 and mortgage lending growth that is above the rate of system growth.
They are big goals. The first-half FY21 insurance margin was 7.1%. To get to 10-12%, Suncorp wants to improve insurance repricing and its loss ratio, and lower expenses.
It won’t be easy, but Suncorp should get there as its insurance premiums increase in the next few years and more customers transact online. Even greater focus on insurance-claim approvals and repair costs could get Suncorp’s insurance margin back to its longer-term average.
Some analysts believe Suncorp’s banking cost-to-income target is too aggressive. Much depends on one’s view of Queensland’s loan growth and whether Suncorp can maintain its market share without having to discount loans and sacrifice some Net Interest Margin.
As stated earlier, I’m bullish on the outlook for Queensland property and jobs (and thus housing finance) as the State recovers from Covid.
Of the two stocks. Suncorp looks better value than BOQ. Morningstar’s $12.50 valuation for Suncorp shares compares to the current $11.40.
Like other general insurers, Suncorp faces the wildcard of weather events. Climate-change proponents argue more extreme weather swings – and natural disasters – are likely as temperatures warm. I prefer to focus on Suncorp’s insurance and banking margins.
Suncorp seems to have more momentum than it has had in years. Like BOQ, I’d watch and wait for better value in Suncorp during a sharemarket pullback later this year.
Also, like BOQ, Suncorp has excellent leverage to stronger housing finance (and insurance growth) in Queensland during and after Covid.
At $11.40, Suncorp should yield about 7% in FY22 after full franking.
Chart 2: Suncorp
Source: ASX
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at July 27, 2021.
