Company overview - Australia and New Zealand Banking Group Limited provides a range of banking and financial products and services. The Company's segments include Australia; New Zealand; Institutional; Asia Retail & Pacific; Wealth Australia, and Technology, Services and Operations (TSO) and Group Centre. The Company's operations span Australia, New Zealand, and a number of countries in the Asia Pacific region, the United Kingdom, France, Germany and the United States. The Australia division consists of the retail and the corporate and commercial banking (C&CB) business units. The New Zealand division consists of the retail and the commercial business units. The Institutional division services global institutional and business customers. The Asia Retail & Pacific division consists of the Asia retail and the Pacific business units. The Wealth Australia division consists of the insurance and funds management business units. The TSO and Group Centre division provides support to the operating divisions.

 ANZ Details

Review of ANZ’s mortgage capital model: Recently, APRA (Australian Prudential Regulation Authority) has completed its review of ANZ’s mortgage capital model and approved the new model for Australian residential mortgages to be adopted from June 2017. Adoption of the new model is expected to decrease ANZ’s Level 2 Common Equity Tier-1 ratio by 26 basis points based on ANZ’s balance sheet at 31 March 2017, representing an average risk weight applied to the Australian mortgage portfolio of a little over 28.5%. However, the impact is consistent with ANZ’s 2017 capital management plan as no additional capital management actions are required and the Group expects APRA to make further changes to sector capital requirements through a clarification to the “unquestionably strong” capital framework.


Responding to changing customer expectations; (Source: Company reports)

Impact of the Australian Government’s proposed bank tax: In recent budget, the Australian government determined that the banking sector is highly concentrated with major banks having significant pricing power and capability to benefit shareholders at the expense of their customers. Keeping a few related aspects in mind, the Government had announced for a six basis-point levy on the deposits of the country’s biggest banks in its annual budget that will bring A$6.2 billion over next four years and provide a more level playing field for smaller, regional banks and non-bank competitors. With the implementation of the new levy, Australia's largest banks - Commonwealth Bank of Australia, Westpac Banking Corp, Australia and New Zealand Banking Group, National Australia Bank and Macquarie Group, will pay the charge on their liabilities including corporate bonds, commercial paper, certificate of deposits and tier-2 capital instruments. However, ordinary bank deposits, mortgages and other deposits protected by the financial claims scheme will be excluded from the levy base.



Size of Australian banking groups (by total resident assets); Source: Budget documents 2017-18
 
The tax is expected to be paid on a quarterly basis, with the first payment to be made be for the September quarter 2017. ANZ estimates that the annual monetary impact of the tax would be approximately $345 million on a before tax basis, and approximately $240 million after tax based on its financials as on 31 March 2017. ANZ’s balance sheet is also undergoing change due to strategic initiatives that will impact the size of the tax paid. Further, the net financial impact, including the Bank’s ability to maintain its current fully franked ordinary dividend, will be dependent upon business performance and decisions make in response to the tax.

S&P downgrades Australian Banking Industry: Standard & Poor’s (S&P) has lowered its assessment of the standalone credit profiles of almost all financial institutions operating in Australia. As a result, S&P has downgraded its ratings on hybrid and subordinated debt instruments issued by ANZ by one notch in line with ANZ’s revised standalone credit profile. S&P also affirmed ANZ’s senior unsecured credit rating at AA-(long term) and A-1+ (short term).

Implementing agile approach to transform customer experience: Recently, ANZ announced that it will implement the scaled agile approach to organizing and delivering work within its Australia division to enable it to respond more quickly to changing customer expectations, engage and empower staff, and continue to improve efficiency. It has been already using the strategy to deliver around 20% of technology and digital projects including initiatives such as Apple Pay. The use of agile means a much less hierarchical to build around small, collaborative, self-directed teams focused on delivering continuous improvement in the customer experience. For H1FY17 ended 31 March, ANZ reported 6% yoy growth in statutory profit after tax at $2.9 billion and 23% yoy growth in cash profit at $3.4 billion. Further, ANZ’s Common Equity Tier 1 Capital Ratio increased by 52 basis points (bps) from 30 September 2016 to 10.1% at 31 March 2017, while Return on Equity (ROE) increased by 210 bps to 11.8%. The Interim Dividend of 80 cents per share fully franked, is the same as the Interim Dividend in FY16, reflecting a pay-out ratio of 69%.



Group performance trends; (Source: Company reports)

The bank has implemented new initiatives for customers included reduced interest rates on some credit cards, new debit cards to improve accessibility for vision impaired customers, and plans to improve security by voice biometrics. Moreover, to support small businesses, bank has launched innovative digital solutions such as ANZ BladePay and ANZ Be Trade Ready. Further, the bank also saw significant financial benefits emerged from the strategic and tactical decisions it took in 2016 to simplify the business, improve productivity and increase capital efficiency. Importantly, its strong organic capital generation performance that witnessed Australian Prudential Regulation Authority (APRA) Common Equity Tier 1 capital ratio above 10.1% for the first time and, Return on Equity increased materially for the first time since 2010.



Results summary; (Source: Company reports)

Delivering more of services through digital channels: In Retail and Commercial Banking in Australia and New Zealand, the bank is focussed on being the best bank for home owners and people who want to start and run a business. Both Australia and New Zealand delivered a solid performance during H1FY17. The bank is growing prudently in-home lending in Australia by concentrating on owner-occupiers, and through a focus on the small business segment. It also moving quickly to meet customer expectations by delivering more of services through digital channels as digital sales increased by 24% yoy in Australia. Notably, the performance of Institutional Banking has been robust and continued to reshape the business to improve returns through the distinctive proposition by supporting trade and capital flows on a smaller group of customers with its capabilities in Australia, New Zealand and Asia. Institutional total risk weighted assets (Risk Weighted Assets) have reduced by $23 billion during the past 12 months, while expenses have fallen 9% yoy as of H1FY17.



Revenue contribution; (Source: Company reports)

Increasing capital allocation to Retail and Commercial businesses: Currently, over 50% of group capital is allocated to the Retail and Commercial businesses in Australia and New Zealand up from 44%. Further, capital reallocation is evidenced in a $7b net decrease in Credit Risk Weighted Assets (CRWA) from the end of FY16 on a constant currency basis, and it includes a $2b increase in Retail and Commercial offsetting a reduction in Institutional CRWAs of $8b. The Group CET1 ratio was 10.1% at 31 March, and net organic capital generation of 119 bps in the half was primarily driven by earnings growth along with RWA reduction. Since the start of FY2017, ANZ has signed agreements to sell its 20% stake in Shanghai Rural Commercial Bank, the UDC Finance business in New Zealand and ANZ’s Retail and Wealth businesses in six Asian countries. The transactions are expected to complete during FY2017 and 1H2018 subject to regulatory approvals and disposal of non-core assets were expected to increase its capital base by an additional 65 - 70 bps by the end of FY17.Going forward, provision charge in 2017 is expected to remain broadly similar as a percentage of gross lending assets.



Portfolio re-balancing; (Source: Company reports)

Strong funding and liquidity position: The group has a strong funding and liquidity position with the Net Stable Funding Ratio at 113% up 5% from 30 September 2016, led by strong retail deposit growth in Australia. Importantly the total provision charges of $720 million ($787 million individual provision charge and a $67 million collective provision release) equates to a loss rate of 25 bps, a decline of 11 bps from the end of 2H16, and gross impaired assets over the same period decreased 7% to $2.94 billion with new impaired assets down 3%. Although, the credit environment demonstrating pockets of weakness, improved soft and hard commodity prices are beginning to provide flow through benefits. However, it is anticipated sluggish consumer spending off the back of flat real income growth could continue to see the economy perform below trend.



Capital and funding position; (Source: Company reports)
 
The stock lost 10.8% in last three months (as at June 19, 2017), led by the new headwinds in the form of levy on banks liabilities coupled with challenging operating environment and, we believe that the recent negative developments are incorporated in the current trading price. Given the banks adequate liquidity and funding position with reductions in provisions, we give a “Buy” on the stock at the current share price of $ 28.380
 

ANZ Daily chart; (Source: Thomson Reuters)
 

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