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

Australia and New Zealand Banking Group Ltd (ASX: ANZ) has lately announced about 7% downgrade to its FY18 forecast earnings given the remediation costs and other fines levied owing to the banking sector challenges. The downside risk to earnings is still not expected to bring a material impact on overall fundamentals. The group has a better cost performance compared to many of its peers. It has a leading capital position and a buyback would help the group deliver stable earnings per shares scenario in the medium term.

Launch of digital trade finance network: Lately, ANZ with Citibank, BNP Paribas, Standard Chartered, and Deutsche Bank agreed to join digital trade information network. This network is expected to be operational by the third quarter of 2019 and the banks have already signed a Memorandum of Understanding (MoU) to create the global digital network in the space of trade finance. The key aim is to enable cheaper and easier funding when it comes to establishing support for corporates. Typically, in trade finance, funding and other services are offered by the banks to importers and exporters to enhance business transactions. However, each lender is used to deal separately with clients and employs different standards; and by linking corporates, the suppliers and banks through a standardized digital platform, can set a target to lower costs as small and midsized companies will be able to submit and verify purchase orders and invoices to request trade financing. The capability of the banks to access trusted trade information can help the network in minimizing the risk of double financing and fraudulent trade information across the industry. It has been said that many banks (about 20 in number) are coming together and assisting each other to develop the network. Further, 60 big corporates have been approached under the above initiative. It is projected that this network could finance a pivotal part of the $ 1.5 trillion demand estimated per year for trade finance from small and medium sized companies, which currently goes unmet by the industry due to higher costs and risks. Moreover, the network will have an open architecture and standardised connectivity, which will be based on a governance model similar to SWIFT. Currently, SWIFT is a messaging system used by banks over the world to send information and instructions in an encrypted format through a secure channel.


ANZ Financial Performance (Source: Company Reports and Thomson Reuters)

Effects of Royal Commission: ANZ shares plunged after the bank said that its annual result will be overall affected by $824 million hit with more than half that amount of approximately $421 million, being used to compensate the customers who had received inappropriate advice or were charged fees for no service.  ANZ has flagged to witness charges of about $ 374 million after tax in 2H of FY18 and this has been in relation to refunds to customers along with related remediation costs. The amount is in addition to $ 48 million in provisions that were made in first half of 2018 in relation to remediation costs. The $824 million in total impairments include $697 million that relate to continuing operations. The amount includes $206 million as write down on value of the software assets used in its now largely abandoned Asian businesses. Further, about $ 711 million will be booked in 2H to September 30, 2018. Along with the customer remediation and software expenses, ANZ expects to record a $104 million hit on the restructuring of its Australia and Technology Divisions. The bank also revealed that its legal costs for the royal commission for 2018 would be $55 million or $38 million after tax, with the majority of that amount of approximately $27 million, recorded in the second half of 2018. These impairments come as the bank's chief executive, Shayne Elliott, had prepared for a public grilling which he had appeared at the government's ongoing review of the banking sector. However, the impact of these additional charges on ANZ’s Common Equity Tier 1 capital position compared to 1H18 is projected to be less than 10 basis points. For the royal commission, the banking sector's false fees for no service scandal has been a key point and all the big four banks had admitted of charging customers, that comprised of in some cases for dead customers, for services that they had not received. Other banks and wealth managers are also setting aside cash or making provisions to restructure their businesses, to defend their lawsuits and compensate customers, while managing for tougher laws and tighter margins. On the other hand, Australia and New Zealand Banking Group has fired over 200 staff for their wrong doing, that includes some senior executives. This is due in part to issues that have been raised at a public inquiry into financial sector misconduct. Elliott in his first public comments addressing to the criticism leveled at the bank in the inquiry’s interim report, said that the bank would take a stricter approach to punishing bad conduct. In the previous year, approximately 10 senior ANZ executives had been dismissed for issues related to misconduct. The steps are taken in order to improve the governance since the quasi-judicial inquiry, or Royal Commission, exposed widespread misconduct across the financial sector.


Estimated Impact to profit after tax (versus prior comparable period) (Source: Company Reports)

Disinvestments: IOOF Holdings Limited has completed the acquisition of the Australia and New Zealand Banking Group Limited (ANZ) Aligned Dealer Groups (ADGs) and further arrangements required for the completion of the acquisition of the ANZ One Path Pensions and Investments (ANZ P&I) business have been indicated. However, the final completion of the acquisition of the ANZ P&I business, that is been acquired by IFL is projected to take place after successful completion of a  whole transaction expected to complete towards the end of March 2019. Moreover, after the completion of acquisition of ANZ ADGs, full legal ownership is transferred to IFL effective from 1 October 2018. However, the completion will be possible only after an initial payment by IFL of $800m to ANZ to subscribe for a debt note. Further, ANZ will have to pay a coupon rate of 14.4% to IFL, that is approximately equivalent to 82% of the economic interests in the ANZ P&I business, from 2 October 2018 until the debt note is redeemed. This is anticipated to be after the completion of the acquisition of the ANZ P&I business.

Increased variable home loan rates: ANZ has increased the variable home loan interest rate in Australia after the sustained rise in wholesale funding costs, due to consideration of business performance and market conditions. ANZ has increased the variable interest rates for Australian home and residential investment loans by 0.16%pa. The revised changes were effective from 27 September 2018. However, there will be no change to effective rates for home loan customers in drought-declared regional Australia.


ANZ Variable Home Loan Indices (Source: Company Reports)

ASIC’s civil action against ANZ in relation to 2015 Institutional Equity Placement: The Australian Securities and Investments Commission (ASIC) has started civil penalty proceedings against ANZ for failing to comply with the continuous disclosure obligations. This is with regard to an underwritten institutional share placement in August 2015, that is the subject of separate proceedings by the Australian Competition and Consumer Commission. As per ASIC, ANZ should have advised the market that the joint lead managers took up approximately 25.5 million shares of the placement. Meanwhile, ANZ planned to defend these allegations. Moreover, the shares in question formed less than 1% of the shares on issue at the time. The joint lead managers in circumstances took them up where the book had indicated the placement was covered at 103%. The bank was not aware of any precedent for a listed entity to disclose the take up of shares by underwriters in an equity placement.

Capital Management: ANZ has filed a Form 281 with ASIC for the extension of the time period available for its current $3 billion on-market share buy-back by 12 months. Moreover, ANZ has updated its Australian dollar wholesale debt issuance program for the issue of medium term notes and subordinated notes.

Stock Recommendation: ANZ stock has fallen 10.85% in three months as on October 19, 2018 and is trading at a P/E of 11.12x. ANZ is trading at $25.79, and has support at $25.40 and resistance at $28.05. The last candle formed in the daily chart is reflecting a bullish pattern, which shows that the price of the stock can rise further. Meanwhile, Australia & New Zealand Banking Group Ltd. has said that it would book A$374 million in additional charges for the second half of the FY 18 for refunds to customers and related compensation, as well as a further A$55 million before tax in external legal fees tied to the bank's responses to the ongoing commission probe. On the other hand, the group’s fundamentals still look decent while the stock trades at lower levels. ANZ's results are scheduled to be released on October 31, 2018. With a marginal rise in Earnings per Share in the next 12-24 months, a mid-single digit upside to the stock is expected for forward 24 months. As of now, we give a “Buy” recommendation on the stock at the current price of $25.79.
 

ANZ Daily Chart (Source: Thomson Reuters)

 
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