ANZ Banking Group

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
07 November 2016, 10:31 AM
Sectors Covered:
Banks

Key points

  • ANZ reported FY16 cash earnings of A$5,889m, 1.5% higher than our forecast. The beat was largely due to a lower tax rate than our forecast.
  • A final dividend of 80 cps fully franked was declared in line with our forecast.
  • Despite ANZ continuing the run-off of low-returning Institutional RWA, return metrics for the Institutional business are deteriorating and the Australian and NZ Institutional margins (excluding Markets) are in free fall. The NZ Institutional margin is now lower than the International Institutional margin.
  • Restructuring charges to continue in FY17 as suspected.

Further deterioration in Institutional ROE

One of the goals of ANZ's capital reallocation plan is to improve the ROE of the Institutional business by running off low-returning risk weighted assets (RWA). However, our calculations, based on the Company's 'adjusted pro-forma' basis indicate that returns on assets, returns on RWA and returns on gross loans and advances have deteriorated from FY15 to FY16.

Australia and NZ Institutional margins in free fall

RWA run-off in the Australian Institutional business accelerated from 2% over 1H16 to 8% over 2H16, which one would assume is due to the run-off of low-returning assets. However, Net Interest Margin (excluding Markets) contraction in the Australian business accelerated from 8bps over 2H15-1H16 to 17bps over 1H16-2H16. Such a rapid rate of contraction should not be experienced if low-returning assets are being run off. This provides reason to believe that ANZ is losing some high-value customers as an unintended spillover effect of running off low-value customers.

Restructuring charges to continue in FY17

We have previously detailed various risks involved with ANZ's plan to rebalance its capital portfolio. One of these risks was the potential for further restructuring charges. After taking a pre-tax restructuring charge of $138m in 1H16, ANZ has taken another $140m in 2H16 and has signalled that there will be further restructuring charges in FY17, although it will cease classifying these as 'specified items' in FY17. This does beg the question as to why such items were classified as 'specified items' in FY16. While ANZ has indicated that the quantum of restructuring charges will be lower in FY17, it is difficult to be confident that this will be the case.

Investment view

We have made no material change to our FY17 cash EPS forecast, but have reduced our FY18 cash EPS forecast by 2.3% largely due to higher expenses and higher credit impairment charge. Key downside risks include a disorderly rebalancing of the capital portfolio, widening credit spreads and asset quality deterioration being greater than expected.

ANZ remains our least preferred major bank. We retain our Hold recommendation.

More information

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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