Morningstar questions Netwealth future share gains

Mike Taylor

Managing Editor/Publisher, Financial Newswire

21 August 2023

Leading platform Netwealth may have posted a solid 20% increase in underlying net profit after tax but research and ratings house Morningstar is warning investors that its share gains and future margins may be being over-estimated.

In an analyst briefing released the wake of the Netwealth full-year result, Morningstar said that while it expected Netwealth to continue growing market share and earnings, it believed this upside as having been more than fully priced in and rendering the company’s shares overvalued.

What is more the analysis said that future share gains were likely to be slower than the past five years because or resurging competitive pressures, noting evidence that the rate of growth in intermediaries and market share gains had decelerated.

Concurrently, the pace of share losses by major incumbents like AMP and Insignia has slowed. Likewise, there was moderation in the growth rates of new accounts and average account sizes, partly influenced by cyclical factors. A continuation of these trends, even as market volatility subsides, would further affirm our thesis.

“Concurrently, the pace of share losses by major incumbents like AMP and Insignia has slowed. Likewise, there was moderation in the growth rates of new accounts and average account sizes, partly influenced by cyclical factors. A continuation of these trends, even as market volatility subsides, would further affirm our thesis,” the Morningstar report said.

It said the ongoing compression in administration fee margins would limit operating margin expansion.

“While fees were steady over the year, the longer-term trend remains lower fees with the ratio of platform revenue/average funds under administration at 0.33% in fiscal 2023, versus 0.48% in fiscal 2019.”

“We note the impending relaunch of its Core product will come with a “highly competitive pricing structure.” Additionally, competition for client funds will likely limit the upside to margin income. This was hinted in recent updates: The impact of market volatility has led to clients partially withdrawing their money to invest in off- platform investments like term deposits, instead of keeping them in Netwealth’s cash account (where it earns an interest spread).”

“To address this, Netwealth will likely need to start offering higher deposit rates. The upcoming launch of a new Netwealth cash product (offering rates similar to term deposits) substantiates our view. This could reduce its interest spread—an aspect we think the market is ignoring. While we project a gradual recovery in Netwealth’s cash account balances, we expect the interest spread will contract to around 1.2% by fiscal 2028, from about 1.4% currently.”