Company Overview - Australia and New Zealand Banking Group Limited (ANZ) provides a range of banking and financial products and services to retail, small business, corporate and institutional clients. The Company conducts its operations in Australia, New Zealand and the Asia Pacific region. The Company operates on a divisional structure with Australia, International and Institutional Banking (IIB), New Zealand, and Global Wealth and Private Banking. ANZ is one of the four major Australian banks. It is geographically diversified with 70% of the earnings from Australia, 10% from New Zealand and 20% from Asia Pacific, Europe and the Americas. It has materially grown its Asian institutional bank since 2007 and aims to have 25% to 30% of earnings from outside Australia and New Zealand by 2017. In Australia it has the smallest retail banking franchise of the major banks.
Analysis – There is improving momentum for ANZ in Australia. ANZ is winning share in retail and business banking, while the improved performance of its branch network mitigates downside risks to margins. At the same time, productivity benefits from the “Banking on Australia” program are still emerging. ANZ’s credit quality improved in 2H2013, but we estimate that its Australian non-housing loss rate was the highest of the major banks.
Assessing ANZ’s global markets product set at an Institutional divisional level we note that foreign exchange (A$850m) and fixed income flows (A$800m) contribute to 80% of the global markets revenue. We note that exposure to the foreign exchange product segment at 40% of the total Global Markets revenue has been increasing through time, supporting ANZ’s Asian transaction banking platform build out. Form an earnings risk perspective whilst recent volatility in emerging markets may assist to enhance foreign exchange flows in the short term, we remain concerned that a significant increase in volatility may result in Fixed Income, Currencies and commodities (FICC) volumes drying up contributing to a slowdown in Asian trading revenues in the long term.
Domestic retail and business banking in ANZ is estimated to account for only 44% of Group cash earnings, compared with 58% for CBA, 63% for NAB and 53% for WBC. From the glass half full point of view this suggests the significant return on equity potential to ANZ should it close the gap with its peers.
Australia’s banking regulator, the Australian prudential regulation authority or APRA has increased the capital conservation buffer that applies to the four major Australian banks by 100 basis points (1%). The Apra framework released on 23 December 2013 classifies four major Australian banks as domestically systemically important banks (d-SIB) under the tough Basel 3 rules. All four major banks already meet or exceed APRA’s higher capital requirement and in our opinion ain a very strong position to comply with the increased capital requirements by the 2016 implementation date. The 1.0% surcharge tot the current 2.5% capital conservation buffer for D-SIB bank takes the buffer to 3.5% in addition to thee minimum capital requirement for the common equity tier 1 or CET 1 ratio of 4.5%. Therefore by 1
st January 2016 APRA will require the four D-SIB banks to hold a minimum of 8% CET1 capital. ANZ bank at 8.5% will have no trouble complying with the tougher new rules without the need to raise new capital.
Source – Thomson Reuters
A central theme is likely slow growth in the Australian banking system in coming years. There is a structural shift in the world economy as economic growth shifts from West to East, with the ANZ bank positioned in the right part of the with a credible plan at the right time. We think that the super-regional strategy can succeed, though the returns are long dated and shareholders need to be patient. No Australian bank has built such a large platform in Asia before and the upfront investment in acquisitions, capital, branches, systems and staff might not pay off in commensurate revenues.
|
ANZ (AUD, Millions) |
2013 |
2012 |
2011 |
2010 |
2009 |
|
Interest Income, Bank |
28,627 |
30,538 |
30,443 |
26,608 |
26,286 |
|
Total Interest Expense |
15,869 |
18,428 |
18,943 |
15,739 |
16,398 |
|
Net Interest Income |
12,758 |
12,110 |
11,500 |
10,869 |
9,888 |
|
Net Income After Taxes |
6,282 |
5,667 |
5,363 |
4,505 |
2,945 |
Risks arise from increased competition in Asia as international banks target emerging markets for growth. Value destruction may also occur from overpaying for bolt on acquisitions. Pressure on domestic banking fee income in fiscal 2013 is partially offset by more fee based business in Asia.
|
|
Industry Median |
2013 |
2012 |
2011 |
2010 |
2009 |
|
Profitability |
|
|
|
|
|
|
|
Net Interest Margin |
2.14% |
2.22% |
2.31% |
2.42% |
2.47% |
2.31% |
|
Efficiency Ratio |
48.4% |
44.7% |
48.2% |
47.5% |
47.2% |
46.3% |
|
Operating Leverage |
3.4% |
7.4% |
(1.5%) |
(0.5%) |
(2.2%) |
1.0% |
|
Risk |
|
|
|
|
|
|
|
Loan Loss Provision (% of Avg. Loans) |
0.27% |
0.27% |
0.29% |
0.33% |
0.52% |
0.90% |
|
Nonperforming Loans (% of Total Loans) |
0.77% |
1.25% |
1.53% |
1.78% |
2.17% |
1.97% |
|
Earning Power |
|
|
|
|
|
|
|
Pretax ROA |
1.4% |
1.3% |
1.3% |
1.4% |
1.3% |
0.9% |
|
Pretax ROE |
19.8% |
20.8% |
20.2% |
21.3% |
19.9% |
14.9% |
ANZ bank is a leveraged financial group exposed to most segments of the economy and therefore will suffer from any deterioration in economic conditions. Higher interest rates, inflation and unemployment can reduce loan growth and increase bad and doubtful debts expense while exchange rate volatility can affect certain business sectors. ANZ bank might not be adequately provisioned for a significant increase in bad debts. Approximately 15% of total fiscal 2013 funding was sourced from term wholesale funding markets, but ANZ bank has the lowest wholesale funding requirement of the major banks.
The banking sectors in Asian countries might not be as prudently regulated as in Australia. The Central theme of the Asian strategy is capturing the benefits of trade flows between Australia and Asia, rather than rapidly expanding the loan book. This should advantage shareholders in the long run as we expect the Asian trade to grow, but it exposes shareholder to downturns in trade both within Asia and between Asia and Australia.
The super-regional strategy requires substantial upfront investment in banking infrastructure. This will restrain regional earnings growth until ANZ bank can drive faster banking and fee income. The normalisation of institutional bad debt expense from the peak of financial crisis has finished. This removes a convenient source of earnings growth at a time when less revenue growth is available in
Australia. Slow core earnings growth could resurface due to unexpected margin compression, lower banking fee income, subdued wealth and markets income and a worse than expected outcome eon costs. We think that the stock is currently expensive and will visit it again at a later stage.
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