ANZ Banking Group: Expecting expenses to disappoint near term
About the author:
- Author name:
- By Azib Khan
- Job title:
- Senior Analyst
- Date posted:
- 26 October 2021, 7:30 AM
- Sectors Covered:
- ANZ Banking Group (ASX:ANZ) will report its FY21 result on 28 October 2021. We are forecasting cash earnings from continuing operations of $6,017m, which appears to be broadly in line with consensus.
- We are forecasting a final dividend of 69cps fully franked.
- We have reduced our FY21 cash EPS forecast by 4.3% as a result of: notable items of $129m after tax; lower home loan growth forecast; lower markets income forecast and a higher operating expense forecast.
Expecting Australian home loan growth to disappoint
ANZ disclosed at the time of its Jun-21 quarter Pillar 3 release that its Australian home lending had contracted by $0.3bn over the quarter. APRA data shows that ANZ’s Australian home lending continued to contract over the months of July and August, such that the book contracted by 1.0% from Mar-21 to Aug-21.
While we expect ANZ to cite higher paydown rates as one of the key reasons for the contraction, we believe ANZ’s home loan turnaround times remain sub-standard, and we believe this is contributing to softness in new home loan flow.
Looking for NIM discipline after excluding Treasury & Markets
In overall terms, we expect NIM contraction of 2bps from 1H21 to 2H21. We expect Treasury & Markets to be a drag on headline NIM in 2H21.
A positive side effect of Australian home loan contraction will hopefully be that ANZ is experiencing a less pronounced front to back book NIM headwind than peers.
We expect a favourable shift in funding mix as a result of strong growth in customer deposits, particularly low-cost deposits, relative to group loan growth.
We expect the benefits of deposit repricing conducted in 1H21 to flow through to 2H21.
We expect further reduction in the average cost of wholesale funding in 2H21 as a result of TFF drawdowns and maturing term debt.
We expect the increases seen in 3-year and 5-year swap rates over 2H21 to favourably impact the return on the replicating portfolio to the extent that we do not expect a NIM drag from the replicating portfolio in 2H21.
Subdued Markets income to be partly offset by higher M&A-related revenue
While we expect subdued levels of volatility to adversely impact currency and interest rate sales and trading income, we expect some of this softness in Institutional revenue to be offset by the positive impact of higher M&A activity on revenue from loan syndications and debt capital markets.
Expecting expenses to disappoint in near-term
We expect ANZ’s FY21 operating expenses to be 2% higher than consensus, and we therefore expect ANZ’s expenses to disappoint the market in the near term.
While we expect ‘business as usual’ expenses to be sequentially lower in 2H21, we expect an increase in investment spend in 2H21 as a result of investment related to BS11, digitisation and cloud infrastructure.
Assuming flat provision coverage
We expect credit quality trends to remain sound. As part of its Pillar 3 disclosures released in August, ANZ disclosed a credit impairment benefit of $32m. This consisted of an individual provision charge of $21m and a net collective provision (CP) release of $53m.
We are forecasting ANZ’s CP coverage of credit risk weighted assets (CRWA) to remain unchanged at 1.24% from Jun-21 to Sep-21. However, we see scope for further CP release given that this coverage remains above the pre-pandemic level of 0.94%.
We are forecasting a credit impairment charge of $34m for 2H21.
Investment view and changes to forecasts
We have reduced our cash EPS forecasts by 4.3%/2.9%/2.9% for FY21F/FY22F/FY23F respectively.
Our target price, based on our DDM valuation, is reduced to (login to view).
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