ANZ Banking Group

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
30 January 2017, 2:12 PM
Sectors Covered:
Banks

Key points

  • ANZ remains our least preferred major bank.
  • The current share price and consensus forecasts are factoring in much optimism which is inconsistent with the unpleasing trends seen in FY16 and inconsistent with the execution risks involved.

Consensus forecasts factoring in much optimism on income

Our FY17 cash earnings forecast is ~5% lower than the current consensus forecasts. Consensus numbers appear to be factoring in much optimism on both the income front and the expense front. On the income front, we believe consensus is not taking into account the following important points:

  1. ANZ's Australian and New Zealand Institutional margins (excluding Markets) have been in free fall despite the run-off of low-returning assets;
  2. There is enough reason to believe that ANZ is losing high-margin, high-value customers as an unintended consequence of its capital reallocation strategy;
  3. Run-off of trade finance exposures is now close to an end, which does not bode well for the margin outlook of the Institutional division;
  4. The positive impact of Aug-16 and Dec-16 home loan re-pricings on group NIM will be offset by lower margins on low cost deposits and free funds as well as lower margins on term deposits;
  5. We expect no growth in non-interest income from FY16 to FY17F; and
  6. Institutional ROE has deteriorated.

Consensus also optimistic on expenses

Our operating expense forecast for FY17F appears to be ~2% higher than current consensus forecasts. Consensus seems to be reflecting an overall assumption that the 'specified' expense items seen in 2H16 will largely not recur in FY17. However, we expect the specified items to largely recur. 

We discuss this further in our detailed research note on ANZ (clients only).

Asset sales announced will prove to be decremental to EPS

Earlier this month ANZ announced separate agreements to sell its 20% stake in Shanghai Rural Commercial Bank (SRCB) and its UDC Finance business. While these asset sales will boost ANZ's CET1 capital ratio, we believe the boost will not be enough to compensate for the earnings hole created by the sales. If ANZ were to ultimately return the capital released in the form of share buybacks, we believe it will turn out that each of the two asset sales announced will be decremental to cash EPS.

Investment view

ANZ's share price and consensus forecasts are building in a lot of optimism which is consistent with the aspirations of the Company (with regards to the rebalancing of the capital portfolio) but inconsistent with the execution risks involved and inconsistent with the not-so-pleasing outcomes of the remedial actions taken thus far. 

As a result of the asset sales announced and our view that these sales are decremental to EPS, we have reduced our cash EPS forecasts by 2.8% in FY17F, 5.2% in FY18F and 4.0% in FY19F.

We retain our Hold recommendation.

More information

Morgans clients can login to view our detailed report and share price target for ANZ Banking Group (ANZ). Alternatively, please contact your nearest Morgans office for access.

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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