Get up to 2 Years of free subscription by inviting your friends to KALKINE!

For every friend of yours who joins KALKINE, we'll give you 3 months of free subscription (up to a limit of 24 months free subscription). If you recommend 3 friends and they join within a month of you referring them, you get 1 year free subscription to KALKINE reports added to your account (up to a limit of 24 months free subscription). Simply reply to this email with their name, e-mail and phone number.
 

ANZ Video

Stock Of the Day  - ANZ Bank  (SELL)

With regards to ANZ Banking Group (ANZ), recent trend shows a little unrest in share prices. The outlook appears a bit more challenging in near term. The capital generation has surged while there has been a slump in revenue growth. This is more or less occurring due to increase in mortgage competition.

 
Trading Updates (Source – Company Reports)

If we look at the 1Q15 trading update by ANZ for three months to 31 December 2014, a 3% increase in unaudited cash NPAT to $1.79 billion over prior corresponding period is noted with the reported NPAT of being the order of $1.65 billion. This amounted to be below expectations and consensus given foreign exchange changes that led to higher expense base. Also, some key business enhancement projects (such as new digital platform for the Australian business) became operational affecting the expense base. In fact, ANZ itself gave a negative commentary reporting that the current year 2015 provides a volatile environment as the benefits from lower Australian dollars have been balanced by economic downturns including the commodity prices to some extent. We also noted earlier that fall in Australian dollars has in general benefited the bank with foreign profits and receiving of collateral inflows from currency exchanges used to hedge offshore bond issues. For instance, a 5% fall in AUD leads to an annual inflow of $2 billion to $3 billion as reported by ANZ in a regulatory filing in October 2014.

As part of the business updates, Australian Retail and Commercial business reportedly yielded good performance. Market share gains in home lending along with progress in small business lending was noticed. However, submissive performance was witnessed for the corporate sector. Economic boost in New Zealand profited ANZ with good productivity results. The Central Bank’s monetary policy on margins affected International and Institutional Banking. The credit quality although has improved. ANZ lately announced that it has successfully completed its offer of ANZ Capital Notes while raising $970 million of Additional Tier 1 Capital (prior to Offer expenses). The bank has also kicked-off the sale of Oasis and PortfolioOne platforms, which stock a combined $8.3 billion of assets. This comes as a focus to invest money elsewhere.


Statistics for New Zealand (Source – Company Reports)

Despite few positives, the factors that are found to be impounding include the margin compression (margin cut down to 6bp in 1Q15) steered by International and Institutional Banking markets income. Mainly, the International and Institutional Banking has been spotted as a growth drag for the bank and the poor trading income were known to offset the markets income. Then factors such as high cost growth and unfavorable market environment commentary by ANZ along with trade volumes affected by dwindling commodity prices are looked upon as big concerns.


Strategic Priorities and Outlook (Source – Company Reports)

It is also noted that a survey by UMR Research unveiled that ANZ along with three other banks including Commonwealth Bank have offered businesses incentives which have ranged from free tickets to sporting events and lower insurance premiums to discounted interest rates on business overdrafts on switching from default super funds to retail funds. This brings all eyes over to the banks. It is also quite hazy whether banks are in an effervescent position which may spurt as the markets do not expect shares to be very highly resilient as seen in the past given high level of competition and limited scope for credit growth. It appears that overall banks’ share prices are more than their fundamental value. The dividend yields may appear to be a point of attraction for investors in the falling interest rate environment. Although, ANZ believes that the FY15E dividend payout ratio may remain at the upper end of the target range of 65% to 70%, a flat dividend in FY16E is expected with any increase in capital requirements.



ANZ Daily Chart (Source - Thomson Reuters)

The price-earnings ratio have otherwise surged for banks (around 16.1 times) but still is not very extraordinarily high. The price-to-book ratios are also moderate. Then, growth in household or corporate segment may only be moderate given the economic downturn. It is thus a very sensitive area to gauge for the extent of rise in ANZ stock. Then, the effect from the new but tough capital rules signposted by New Zealand’s central bank on property loans to investors which may impose specific lending restrictions with regards to higher capital requirements for loans, is also under speculation.

Accordingly, we put a SELL recommendation for this stock at the current price of $35.16.