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. It also operates in a range of other countries, including the United Kingdom and the United States. The Company operates on a divisional structure with Australia, International and Institutional Banking (IIB), New Zealand, and Global Wealth and Private Banking. In September 2012, it sold its remaining shareholding in Visa Inc. In May 2013, the Company ceased to be substantial holder in respect of ING Private Equity Access Limited. In May 2014, the Company and its subsidiaries ceased to be a substantial holder of WestSide Corp Ltd. In July 2014, Australia and New Zealand Banking Group Ltd completed the sale of ANZ Trustees Ltd to Equity Trustees Ltd.

Analysis - With the focus gradually shifting back towards financial sector, we bring you today an analysis for the Australia and New Zealand Banking Group Limited (ANZ).

For 1H14, the Group’s statutory profit was $3.4 billion up 15% as opposed to that of 1H13; cash profit was $3.5 billion, i.e., 11% increase from that of 1H13. The Group reported a fully franked interim dividend of 83 cents per share, which is an increase of 14%. Further, ANZ’s income rose by 3.6% and expenses were up by 1.7%. The Group’s total shareholder returns were 19% for the past twelve months.


Performance Highlights – 1H 2014 compared to 1H 2013 (PCP) (Source – Company Reports)

The Group is witnessing growth in its core franchises – New Zealand and Australia. At the same time, its international business, particularly Asia, is also on the front-foot with improvement in returns. The Group also witnessed 43% rise in profits from International and Institutional in Asia Pacific, Europe and Americas (APEA), as per the results for 1H14.


Revenue (Source – Company Reports)

The Australia Division witnessed profits rise of 5%, with 4% income growth, a 2% rise in expenses and a 4% increase in the provision charge. Customer deposits went up 7% with 6% growth in lending. The Group had the strongest home loan growth among its peers. ANZ has about 110,000 net new customers on board across Retail and Commercial. Also, the average monthly customer complaints have gone down by 9%. Investment in Banking on Australia Program is bringing benefits in Australia. This program entails new digital solutions for ANZ’s customers. The Group is setting a strong footprint in mobile and digital channels segment which includes ANZ goMoney based transactions, etc. However, the Company admits that recovery of Business confidence in Australia is little slower than expected.


Operating Revenue, Cash NPAT, and Customer Lending by Geography (Source – Company Reports)

The Group is having a better position in New Zealand. Improved productivity was witnessed in view of New Zealand’s economic recovery along with ANZ’s move to a single brand and technology platform.  The Group has seen a profit rise of 21% in 1H14. Productivity and growth has improved with 3% rise in income and 6% decrease in expenses. Lending increased by 5% and customer deposits went up by 7%. The Commercial business has expanded across all regions with Small Business Banking being the strongest. 


Cash Profit by Division – March 2014 Half Year v March 2013 Half Year (Source – Company Reports)

ANZ’s Global Wealth Division witnessed a profit increase of 11% with operating income up 8% and expenses up 7%. The Group is trying to better the customer experience by virtue of wealth solutions integrated with ANZ’s banking offerings. The operational productivity and revenue performance were positive owing to strong growth in funds under management, and few other factors. Even, in-force insurance premiums steered a healthy underlying performance.

With regards to the International and Institutional Banking, ANZ’s profit grew by 9% with income rising by 4% and expenses up by 3% in 1H14. There were credit quality improvements that drove provisions down to 18%. The Group is achieving earning diversification through 52% of income emanating from regions outside Australia and New Zealand. This business services customers Foreign Exchange, Interest Rate management and Commodities needs. ANZ’s income for this segment went up in view of healthy customer sales. Particularly, the Group’s income from Asia-based customers increased by 34%.


Business Confidence for ANZ (Source – Company Reports)

The business confidence for ANZ has improved recently. Although not translated into demand for business credit, the increased confidence has helped increase the customer numbers. We also note that ANZ has reported its position as a well-capitalized Group with an APRA Common Equity Tier One ratio at 31 March of 8.33% or 10.5% on an internationally harmonized Basel 3 basis.

We all noted the softness in the ASX listed hybrid and debt market, which has affected banks to an extent. However, the recent trends in banking sector illustrates ANZ with peers such as NAB to show positive market share momentum in recent years.


ANZ Group Strategy (Source – Company Reports)

Nonetheless, with respect to handling economic challenges, ANZ has reduced their branch numbers (by 2%) as other banks. It appears that this may be a medium-term driver of industry productivity gains as ANZ witnessed the healthiest increase in branch productivity in 2014 in view of such a step.

Looking at the Group’s Asia Partnerships’ portfolio, we note that ANZ’s investments are in Indonesia with PT Bank ANZ Indonesia, in the Philippines with Metrobank Cards Corporation, in China with Bank of Tianjin and Shanghai Rural Commercial Bank, in Malaysia with AMMB Holdings Berhad and in Vietnam with Saigon Securities Incorporation.

However, ANZ’s recent announcement with regards to selling its 17.5% shareholding in Vietnam’s Saigon Securities (SSI) to SSI chairman Mr. Hung Duy Nguyen and a group of Vietnamese investors speaks for ripening of few fruits here. Primarily, ANZ did not receive any positive earnings from Saigon Securities since 1H11. The selling may help ANZ improve its returns, though the financial impact from this step may not be very great. It does reflect ANZ‘s strategy to divest businesses/ partnerships with low returns in said region. More importantly, the improved returns from such strategies are expected to assist ANZ in bettering the ROE gradually.
The above decision comes after the ANZ’s erstwhile decision to sell ~10% interest in Sacombank in early 2012. Therefore, there are good chances that ANZ explores divesting other investments relating to comparable organic offerings such as Panin in Indonesia.

Few factors which may impact ANZ - The to-be-held meeting for outcomes on mortgage risk weights along with the final recommendations of the Murray Inquiry may shed some light on banks performance and activities. Additionally, full year results announcement which is due on 31 Oct 2014 during investor presentation, may indicate more positives and negatives for ANZ.


ANZ Daily Chart (Source - Thomson Reuters)

Nonetheless, we do note that ANZ is putting in efforts for enhancing its customer experience and improving banker capabilities by reshaping banker roles for better customer access; honing staff’s capabilities and knowledge; building lead in mobile and digital arena; simplifying products and processes for productivity enhancement; and augment connectivity and landscape for access to super regional opportunities. 


Portfolio Diversification by Business Mix (Source – Company Reports)

ANZ invests continually in the Small Business segment wherein it has achieved healthy levels of lending and deposit growth with higher returns. ANZ is investing to scale-up in New South Wales which is being recognized as largest Australian state by Gross State Product. For Corporate, ANZ highlights a significant cross-over segment between Business Banking and Corporate, and is able to flourish through current potential in Corporate and pre-eminent Institutional product capabilities. For Priority Industries, ANZ is aiming to drive future outperformance through increased exposure to higher growth industries (e.g., Health & Professionals), and growing specialist knowledge and capabilities.

Accordingly, we put a BUY for this stock at the current price of $32.45.

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