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
Positive Start to FY17: Australia and New Zealand Banking Group Ltd (ASX: ANZ) has reported a good 8% growth in the statutory net profit to $1.6 billion in the first quarter ending 31^st December, 2016 over quarterly average of second half of FY16. Good performance in Australia and New Zealand Retail and in Institutional led the cash profit grow by 31% to $2.0 billion (adjusted proforma up 20%). This was also supported by a lower provision charge and the sale of 100 Queen Street. The profit before provisions increased 17% (adjusted proforma up 9%). Moreover, the revenue grew 7% (adjusted proforma up 4%).
 
Significant reduction in expenses: ANZ has made a further progress on the efficiency with expenses down 4% (adjusted proforma down 1%), driven by the group’s efforts of current and prior period productivity initiatives and tight cost management. However, the group Net Interest Margin (NIM) declined several basis points (bps) reflecting the lower earnings on capital and higher funding costs due to the improvement in the liability mix from strong deposit growth.
 

Key Financial Information (Source: Company Reports)
 
Momentum driven by retail and commercial while institutional banking delivered pleasing results: Australia and New Zealand Banking has posted the good performance of the core businesses in Australia and New Zealand during the first quarter of 2017. This is because the retail was again a strong contributor, in particular, in the home lending segment while the lending volumes in Commercial were more subdued. There was good deposit growth in both the countries and was particularly strong in Australia, with Commercial up 6% and household up 4%. Moreover, the bank’s initiatives including ApplePay and AndroidPay are driving ongoing net customer acquisition gains in Australian Retail Transaction Banking. ANZ has reduced the Credit Risk Weighted Assets (CRWA) by $0.9 billion (FX adjusted) during the quarter, with an approximate $3 billion decrease in Institutional lending products, RWA and growth in Markets. Additionally, the improvement in RWA composition, is due to the increased sovereign exposures, that led to a reduction in the average risk weight of the Institutional portfolio. In addition, the Global Markets income in the first quarter of 2017 was $706 million, which benefited from the favorable trading conditions arising from a strengthening USD and rising yield curves. The customer sales and franchise trading accounted for 77% of the Global Markets income and the balance sheet also strongly benefitted from tighter bond spreads. Further, the valuation adjustments provided a $99 million benefit.
 

Risk weighted assets (Source: Company Reports)
 
Progress on non-core Asset Disposals: As part of transforming ANZ, in the starting of 2017, ANZ has reached an agreement to sell its 20% stake in Shanghai Rural Commercial Bank (SRCB) to China COSCO Shipping Corporation Limited and Shanghai SinoPoland Enterprise Management Development Corporation Limited. Based on the agreement, COSCO and Sino-Poland Enterprise would each acquire 10% of SRCB for a total consideration to ANZ of RMB9,190 million (A$1,838 million). Moreover, in the first quarter of 2017, ANZ has signed the agreements to sell the UDC Finance business in New Zealand and ANZ’s Retail and Wealth businesses in five Asian countries. The transactions are expected to complete in the second half of FY2017 and 1H2018 subject to regulatory approvals. Additionally, for the purposes of the comparison, if the earnings from the businesses being sold were to be excluded from Cash Profit performance for 1Q17 it would show the growth of 33% (+31% including).
 
Portfolio composition improvement: In the first quarter of 2017, ANZ’s Gross Impaired Assets have increased by 1.8%. The Total Provision charge was $283 million and the Individual Provision (IP) charge $325 million. A Collective Provision release of $42 million was due to the portfolio composition improvement and exposures transferring to IP. However, there were no changes to management overlays. Moreover, the Risk Weighted Assets grew 1% ($3.8 billion) for the quarter. CRWA grew 1% majorly due to the forex impacts and growth in Australian Home, but lending CRWA was offset by a reduction in Institutional CRWA. Additionally, the average risk weight of the lending book declined 50 bps due to the improved Institutional portfolio mix and Australian home lending growth. 

Credit quality highlights (Source: Company Reports)
 
Specified Items expected to be limited to the impact of disposals: ANZ in FY2016 had classified a number of actions as Specified Items which formed part of the Group’s Cash Profit. This classification had assisted the investors and the analysts to look through the impact of strategic initiatives to determine the underlying business performance trends and it included the disposal of Esanda, restructuring charges, a write down of the valuation for the investment in AmBank, and accounting methodology changes. Further, in 2017 the classification of the Specified Items will be limited to the impact of disposals.
 
Improvement in Liquidity: ANZ’s APRA Common Equity Tier 1 (CET1) ratio was 9.5% at December 2016. Excluding the payment of the 2016 Final Dividend (net of the Dividend Reinvestment Plan), the CET1 increased 40 bps in the first quarter, majorly due to organic capital generation of 48 bps, which is substantially stronger than the Post Basel III 1Q average of 21 bps. There was no capital benefit from asset disposals in the quarter, however the sale of non-core assets will boost ANZ’s APRA CET1 position by approximately $2.7 billion or approximately 70bps upon completion that will further improve ANZ’s capital flexibility. Additionally, the strong deposit growth and solid progress with the group’s term wholesale funding plan has contributed to a further improvement in the group’s liquidity and funding position. The group’s average Liquidity Coverage Ratio (LCR) for the quarter was 137% (proforma 132% if adjusted for the $6.5 billion reduction in the Committed Liquidity Facility effective January 2017). ANZ’s Net Stable Funding Ratio (NSFR) is estimated to be in excess of 108% in the first quarter of 2017.
 
New Zealand segment performance highlights: The division reported an unaudited statutory profit rise of 16% at NZ$403 million during the first quarter of 2017 while cash profit enhanced 18% at NZ$459 million. Better Global Markets trading income and valuation gains on derivatives contributed to this performance. The Customer deposits rose 7% during the period while gross lending enhanced 5%. Expenses fell 3%, or 4% adjusting for charges related with a change to the application of ANZ’s software capitalization policy. Net interest income rose 3% as compared to the same period of last year driven by ongoing lending growth. Rising funding costs and fixed rate home lending demand drove this performance. New Zealanders are leveraging lower interest rates which is driving this change.
 
Stock Performance: ANZ stock has recovered over 10.1% in the last three months (as of February 17, 2017), and we believe this momentum in the stock would continue. The bank has a strong dividend yield and the stock is trading at a reasonable P/E. ANZ is providing the capacity to invest in new initiatives, while maintaining good earnings momentum and increase in market share gains in customer deposits and Australian home lending. The Retail and Commercial in Australia and New Zealand performed well and gained in new-to-bank customers due to the success of ApplePay and AndroidPay. Meanwhile, the group reported that they are a bit more positive on provisions outlook. During the first quarter of 2017 and in the first six weeks of the second quarter, the bank saw a slightly better credit environment as compared to their fiscal year of 2016 performance. As a result, the provision charge in 2017 is expected to be almost same as a percentage of gross lending assets as of fiscal year of 2016. We give a “Buy” recommendation on the stock at the current price of – $ 30.88

 
ANZ Daily Chart (Source: Thomson Reuters)

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