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ANZ Video

Stock of the day - ANZ Bank (HOLD)

ANZ Banking Group (ANZ) released its trading update for 3 months to 31 December 2014 indicating a good start to 2015 amidst a volatile environment. The unaudited cash profit of $1.79 billion and an unaudited statutory net profit of $1.65 billion have been reported.

Strong performance underpinned the results through customer franchises in Australia, New Zealand and Asia. Particularly, Australian retail and commercial displayed great performance with market share gains in home lending and growth in small business lending. On the other hand, the corporate sector displayed submissive performance. For the Australia division, fastest growth occurred in New South Wales. Economic recovery is noted to benefit the market position in New Zealand which is supported by productivity outcomes. The New Zealand division performed well with stable market share in the competitive mortgages market along with strong deposit growth. For New Zealand branch, unaudited cash profit of NZ$415 million, unaudited statutory profit of NZ$425 million, profit before credit impairment up 5%, gross lending up 5% and customer deposits up 7% have been reported.


Risk Weighted Assets as at December 2014 (Source – Company Reports)

Global Wealth has been found to perform well once again given robust in-force premium growth and steady claims with growth in Funds under Management. ANZ Smart Choice Super, the GROW by ANZ digital platform and the ANZ Grow Centre have been found to steer increase in adoption of Wealth products by new and existing customers. A mixed start has been seen for International and Institutional Banking with the central bank monetary policy impacting margins. The monetary policy is continuing to support a steady outlook for credit quality across all the businesses. Further, value of shipments have been affected by the reductions in commodity prices while the trade volumes remained unswerving. There was a good growth in volumes under cash management, predominantly in Asia. Although the total Markets revenues (1Q15 $555 million) were down on the quarterly average for last year reflecting lower trading income, the Global Markets business witnessed its strongest quarterly customer sales result in two years.

There was a 5.2% growth in profit before provisions versus the prior comparable period. It was also noted that revenue was above the quarterly average for FY14. There was an increase in expenses as compared to the FY14 quarterly average indicating impact from exchange rate while some business enhancement projects became operational. For instance, the new digital platform for the Australian business helped in enhancing product speed to market and customer interface. Group Net Interest Margin waned 6bps versus that noted at the end of 2H of FY14. The Bank witnessed a robust deposit growth across geographies. There was a 9% growth in customer deposits with net loans and advances rising 8%.


Individual Provision Charge (Source – Company Reports)

Reduction in impaired assets and improvement in portfolio quality are noticed. The provision charge of $232m was below than that of FY14 quarterly average without any reduction in the management overlay balance. The CET1 capital upgraded by about 20 bps excluding the impact of the FY14 final dividend payment. At 31 December, the capital ratio on an APRA CET1 basis was 8.4%. There was an increase of $17.4 billion for risk weighted assets wherein $8.2 billion was owing to FX translation. Global economic conditions including lower commodity prices balanced the effects of lower Australian dollar. There is an expectation that the market conditions will improve in 2015 after what was recently experienced by the Global Markets business. In a low interest rate environment, the incremental risks in moving from Government guaranteed term deposits at ~3.00% to major bank prefs yielding ~6.00% is worthy of consideration for investors seeking an uplift in yield.


The Bank’s super regional strategy and the capability for organic capital generation are expected to provide further investment opportunities and deliver for shareholders. ANZ is under pressure to some extent to become better capitalised in view of certain rough regulations expected over the coming year.
ANZ expects that dividend payout ratio will be at the upper end of the range of 65 to 70 percent of profit for FY15. Other changes such as stepping down of the Bank’s Australian chief executive, Phil Chronican, as part of an effort to focus on succession planning have been noted. ANZ also few days back announced its latest capital notes. The Bank increased its raising by $100 million to $850 million.


ANZ Bank Video (Source - Thomson Reuters)

Based on the foregoing, we reinstate a HOLD recommendation for the stock at the current price of $34.99.