For Australia's largest lender mortgage insurer Genworth Mortgage Insurance Australia the recent bout of home loan rate hikes by the big four could spell good things ahead or a weakened future for the company, depending on who you speak to.
Headed up by Georgette Nicholas, Genworth is an interesting case, because while the company's most recent results tell a less than stellar tale, a further hit to its income might actually mean improved dividends for investors.
The underlying profit of the lenders mortgage insurance provider, which holds about 40 per cent of the local market and offers protection to lenders from borrowers defaulting on their home loans, fell almost 20 per cent to $212.2 million for the year to December 2016.
In line with expectations, Genworth's gross written premium or revenue also fell 27.8 per cent to $381.9 million from $507.6 million for the year before.
The company saw a decline in its high loan-to-value ratio (LVR) mortgages which are often favoured by first home buyers.
About 17 per cent (or $4.5 billion) of the group's new business for the year was for loans from buyers with a 90 per cent LVR, indicating they borrowed more than 90 per cent of their property's value.
That's a 40 per cent decline from the previous full year, where these types of loans were worth $7.5 billion and made up 23 per cent of new premiums written.
Some analysts concede that the latest out-of-cycle rate increases from the big four over the past week may further cool demand for loans, and particularly those loans with a high LVR. At the same time higher interest rates may mean more defaults, which is a problem for Genworth.
But for self-described contrarian CLSA analyst Jan van der Schalk, who rates the stock a "buy", regulatory pressure to hike rates may be a positive for LMI businesses like Genworth.
"A lot of people would say a higher home loan rate can do two things – number one it means that less people are going to take out mortgages and anyone who is on a variable rate is going to have to pay more and that could lead to higher delinquencies," said Mr van der Schalk.
"But less people taking out mortgages is good for Genworth because it lowers the risk profile. I know that sounds contrarian, because most people would say less mortgages would mean less income."
Mr van der Schalk said banks lowering the riskiness of their mortgages due to the Australian Prudential Regulatory Authority's capital requirements will be "good" for Genworth as it may lead to capital release. This might lead to higher dividends for investors.
"You don't see that in a higher stock price, but you see it in a higher yield or a higher dividend. So with Genworth the real story is do you buy for the yield profile? The yield they are offering is 9 per cent and we think the yield will be, depending on how much walks away, anywhere between 17 and 23 per cent," he said. "Now that's pretty damn attractive."
The value of Genworth stock does seem to support a happier story. They are up 28.7 per cent over the last 12 months, while the benchmark S&P;/ASX 200 Index was up about 13 per cent over the same period. The shares last traded at $2.96, below a 12-month high of $3.50 hit in February 2016.
But the recent confirmation that Genworth had lost its second biggest client Macquarie Bank, whose business represented about 14 per cent of the insurer's gross written premium, following the loss of two other large clients Westpac and National Australia Bank in the past three years, reveals an LMI market flux – suggesting potentially further choppy waters ahead.
In March Morningstar revised its outlook on Genworth from stable to negative "as further significant contraction of its business is outside our expectations of a return to premium growth in 2017".
"The negative outlook reflects a one-in-three chance we may lower the ratings on Genworth Australia over the next two years," Morningstar said.
An analyst at S&P; said that while Genworth is the largest participant in the Australian LMI market, it is under pressure.
"There has been both a reduction in the requirement and take up of LMI across the industry, in the last two years it's been coming back to where it was two or three years ago," he said.
"With higher servicing thresholds being introduced, and also some of the prior participants in the market are self-insuring ... or going to other forms of risk mitigation – so that's going to be going with reinsurers, rather than through a mortgage insurer."
But some analysts believe that growth is not where the real value for Genworth lies for investors.
Morningstar senior analyst David Ellis said that Genworth was a "very interesting stock" for income investors who are prepared to take a higher risk due to the quality of its dividend and the higher yield.
Like Mr van der Schalk, Mr Ellis noted upsides for Genworth investors, who go in with their blinkers off.
"The underlying business is being run very well and it's managing its risks well," he said.
"Irrespective of its headline reduction in new business, it lost Westpac last year and obviously Macquarie so the headline revenue premium is declining but the actual book, if they take no more new business on today, there's seven or nine years of attractive returns for investors. It's quite an attractive stock for retail investors that are seeking higher income, but it does come at a higher risk because it's fully exposed to the res property market."
S&P; has maintained its A+ rating on Genworth, reflecting the company's leading market positions, strong capitalisation and solid operating performance.
"We recognise the decline in gross written premium has been partially driven by industry-wide contraction reflecting regulatory measures to curb investor lending growth and reduced lender risk appetite for high loan-to-value ratio loans," S&P;'s analysts said in a recent note.
And CLSA believes there are further dividend "prizes" ahead.
"Occasionally, very occasionally, there's dividend and profit in getting smaller. The full-year 2016 result shows an insurer at its very best: proactive on claims, provisioning conscientiously, conservative on guidance and careful with its excess capital," Mr van der Schalk said.
"If you have an appetite for risk and looking for good yield, there is no better stock in the market, but if you are worried about downside risk and cannot stomach an earnings hit, then frankly no matter how much it yields you shouldn't be in it."
