ANZ Banking Group: Much ado about nothing?

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
05 May 2021, 3:30 PM
Sectors Covered:

  • ANZ Banking Group (ASX:ANZ) has announced 1H21 cash NPAT (from continuing operations) of $2,990m, which is 13.7% better than our relatively optimistic expectation. An interim dividend of 70cps fully franked has been declared, better than our expectation of 60cps.
  • Not only are the bad debt charge and net interest margin outcomes significantly better than consensus expectations, both these outcomes are better than our expectations which appeared to be the most optimistic on the street.
  • ANZ has reduced its collective provision (CP) coverage of credit risk weighted assets (CRWA) from 137bps at Dec-20 to 125bps at Mar-21. This is making Westpac Banking Corporation's (ASX:WBC) CP coverage of 142bps at Mar-21 look very conservative.
  • We are now forecasting a larger surplus CET1 capital position, and consequently see increasing potential for capital management over our forecast period.

Share price responds negatively as bears split hairs?

We believe there is plenty to like in this result, particularly on the fronts of asset quality, net interest margin and capital. We even found the cost outlook to be pleasing in overall terms given that ANZ has now provided a timeframe for achieving its $8bn cost base aspiration, targeting to be there on a run-rate basis by the end of FY23F.

However, commentary around cost guidance for 2H21 was initially not very clear and appears to have resulted in some misinterpreting that 2H21 costs will be at a level higher than was intended to be guided. We believe this has contributed to the adverse share price reaction today.

It is also possible that some investors do not like the guidance of investment spend rising over FY21F and FY22F before reverting to $1.0bn p.a. in FY23F. Additionally, it is possible that some investors have been disappointed that ANZ is sticking with a $8bn cost base aspiration given that WBC has announced the same cost base target despite WBC being a larger bank.

However, these points do not bother us, as the main point here is that ANZ is providing the market with increasing confidence of achieving the $8bn target, and we consequently expect positive revisions to consensus operating expense forecasts for FY23F. Also, we do not necessarily expect ANZ’s absolute cost reduction efforts to cease upon hitting the $8bn target.

Increasing potential for capital management

ANZ has reported a CET1 ratio of 12.4% as at Mar-21, better than our expectation of 12.0%. This ratio compares with APRA’s ‘unquestionably strong’ benchmark of 10.5%. We are forecasting surplus CET1 capital (above 11.0%) of $8.0bn at end-FY22F, equating to surplus capital of ~$2.80 per share.

ANZ has today said that “the Board does have the flexibility to actively consider returning surplus capital to shareholders in the future once the outlook is a little clearer”.

Investment view and changes to forecasts

We have increased our FY21F cash EPS by 4.6% largely due to a higher credit impairment benefit forecast and higher revenue forecast. We have not materially changed our cash EPS forecasts for the outer years.

We retain an Add recommendation. Our target price, based on our DDM valuation, has changed (login to view).

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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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