In today’s daily we have covered stock research on ANZ Bank (HOLD).









 
The S&P 500 was up by 3.61points or0.18%to 2023.19. U.S indices didn’t move much on Tuesday after the International Monetary Fund reduced its growth forecasts for 2015 and 2016, but the outlook also boosted hopes central banks would take more aggressive policy moves to spark economic improvement. The lower forecasts implied less demand for fuel through 2016, contributing to another fall in crude oil, which pressured energy names despite some bullish results from major companies in the sector.

Yahoo! Inc., Micron Technology Inc. and Apple Inc. jumped more than 1.8 percent to lead technology shares. Netflix Inc. surged 2.2 percent before reporting results. Johnson & Johnson tumbled 3.1 percent after forecasting lower earnings in 2015 as competition cuts into revenue for some of its best-selling drugs. The International Monetary Fund made the steepest cut to its global-growth outlook in three years, with diminished expectations almost everywhere except the U.S. more than offsetting the boost to expansion from lower oil prices.




Yahoo Daily Chart (Source – Thomson Reuters)
S&P ASX 200was down by 1.4points or 0.03%on Tuesday and closed at 5307.7 points. Commonwealth Bank of Australia rose 0.5 per cent to $83.50, Westpac Banking Corporation 0.8 per cent to $32.89, ANZ 0.7 per cent to $31.51, and National Australia Bank 0.7 per cent to $33.56. Oil producer Woodside Petroleum fell 5.6 per cent to $32.25 as Brent crude oil tumbled 2.7 per cent on Monday night to $US48.84 a barrel.
Resources giant Rio Tinto produced more iron ore than it promised in 2014 and sold more than it produced, but it still fell 0.9 per cent to $53.69. Its rival, BHP Billiton, fell 0.8 per cent to $27.48. SPI futures are up 11 points to 5269 at 5.59am AEDT. The Australian dollar opened at US81.70¢, compared with US81.83¢ at Tuesday’s local close.  Iron ore for delivery to the Chinese port of Qingdao last traded up 0.1 per cent at $US68.16 a tonne.

Woodside Daily Chart  (Source – Thomson Reuters)
 
Top Performers on the ASX 200 were :-


 
 
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Stock of the Day - ANZ Bank (HOLD)

Today’s report deals with ANZ Banking Group (ANZ) which is in the news with respect to a sale process speculation for its vehicle and equipment finance business Esanda that provides car loans and finance, motor insurance, etc. The business is reported to have $16.2 billion in loans. Esanda has seen an increase in loan impairments in the year ended September 30. Particularly, Esanda’s impaired loans have been reportedly mounted 22% to $154 million in the period when compared to 2013. Its loan book declined 2% to $16.2 billion over the same period. Overall, the step may proffer prospective opportunities in the financial services deal landscape. The Bank has earlier indicated the interest in divesting of its non-core assets for enhancing return on equity. The Bank got rid of its trustee unit in a $150 million transaction with suitor Equity Trustees sometime back.


Financial Highlights (Source – Company Reports)

Lately, the Bank also announced that on 15 December 2014 it bought-back and cancelled all of its Euro 500 million hybrid trust securities in accordance with the terms of those securities.


Business Highlights, Australia (Source – Company Reports)

The strategy to strengthen the core franchises in Australia and New Zealand; have profitable growth in Asia by servicing trade, capital and wealth flows into and across the region; and build the business on common platforms and processes to reduce unit costs, complexity and risk, are the keys to success for the Bank. This has led to a statutory profit up 15% to $7.3 billion in 2014. The final dividend paid recently was up 14% to 95 cents a share fully franked which makes the total dividend for the year up 9% to $1.78 a share. The Bank has generated good organic capital of the order of $3 billion in 2H of 2014. As a result, ANZ’s Common Equity Tier I capital ratio increased to 8.8%. Gross impaired assets reduced by a further 32%. The international business in Asia Pacific, Europe and America, has been reported to drive about a quarter of the total revenues. As of September 2014, ANZ’s long term debt was A$84.98 billion and total liabilities were A$722.39 billion. The long term debt to equity ratio of the company is 1.72.


Income Statement for the Year ended 30 September 2014 (Source – Company Reports)

In 2014, 106,000 net new customers were added across Retail and Commercial in Australia and there was an addition of another 390,000 customers to the Wealth Division. The absorbed transaction volume increases of ~8% were realized while operations expenses reduced by ~3%.


Global Technology, Services & Operations (Source – Company Reports)

The Bank also intends to make submissions in response to the final report of the Financial System Inquiry (FSI) or the Murray Inquiry, at the invitation of the Federal Government and may be involved in discussions with the Government, APRA and with other interested parties. Overall, the Murray report looks to be positive for bank hybrids. This primarily entailed the recommendation on strengthening the CET1 ordinary equity layer that may turn out to be positive for the credit profile of the bank ASX listed debt and hybrid securities. However, ANZ is seen cum equity raising to address the substantial equity Tier 1 capital requirement. The Bank’s business strategy across its franchise looks appealing and will work well if the Bank were to quickly address the capital position. More particularly, as per the Murray report, the top quartile target for ANZ results in >50% of its additional $6.0b of capital required. This is likely to mean that ANZ is short of capital to the order of $6.0b. ANZ's capital deficit to the global top quartile and/or revised targets is expected to be the largest of the major banks at FY15E.


We also note that the recent rating by DBRS Ratings Limited (DBRS) has been confirmed to be the AA Deposits and Senior Debt rating with a stable trend. This is being supported by the Bank’s strong franchise in Australia and a market-leading position in New Zealand retail and commercial banking, predictable earnings generation, a relatively low risk profile, solid capital levels and its adequate liquidity position. ANZ has been relatively aggressive in its expansion into Asia-Pacific and DBRS also reported that the Bank aspires to have 25-30% of net profit sourced from Asia-Pacific, Europe and America (APEA) by 2017.

This year, i.e., 2015, ANZ expects that the interest rates will remain low and the decline in the Australian dollar may benefit various sectors of the economy. However, this indicates not much of a great growth opportunity. The scope for the bank sector outperformance seen in 4Q CY14 may still persist into the first part of 2015. However, we need to be considerate of the aspects that the net interest margins may have to bear the costs of the RBA’s 0.15% Committed Liquidity Facility. Even the housing lending practices are under scrutiny from APRA and ASIC. There is an exposure to slowing Asian markets for ANZ.



Accordingly, we put a HOLD recommendation for this stock at the current price of $31.51.


 
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