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APRA’s decision to rise Common Equity Tier-1 (CET1) ratio: Australia and New Zealand Banking Group (ASX: ANZ) shares got impacted by theAustralian Prudential Regulation Authority (APRA) decision to increase Common Equity Tier-1 (CET-1) ratios to above 10%. As a result, the stock tumbled over 16% during this year to date. On the other hand, the bank has been raising capital to boost its capital position and meet the recent minimum capital regulatory specifications proposed by Australian Prudential Regulation Authority (APRA). ANZ’s APRA Common Equity Tier-1 (CET1) ratio stood at 8.6% during the nine months ended on June 30 of fiscal year of 2015. With the $2.5 billion Institutional placement, the CET-1 ratio for 2015 improved to 9.2% on a pro forma basis. Additionally, ANZ raised $500 million under the share purchase plan, consequently enhancing the CET1 Ratio by 13 bps to 9.3%. Therefore, the bank achieved a better CET-1 ratio as compared to its international peers which has a comparable CET1 ratio of over 13%. Moreover, Australia and New Zealand Banking Group has one tranche of around $400 million of ANZ Wealth Australia with outstanding debt maturing during March 2016. On the other hand, the decreasing net interest margin by the bank has also added pressure on the investor’s sentiment. However, ANZ made efforts to maintain a stable Net Interest Margin during the third quarter of FY15 and even stabilized its trade and supply chain business margins. The bank is also selling its Esanda dealer finance business, an $8.3 billion business of loans to motor vehicle dealers, to focus on its core business (a trend been followed by the bank’s peers as well who are offloading their non-core businesses as well). ANZ would be receiving around $1.5 billion from this deal, further driving its capital reserves.
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Capital adequacy ratios (Source: Company Reports)
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Focus on Asian Business: Australia and New Zealand Banking Groupis heavily focusing on its Asian business growth and launched a “super-regional strategy” program to build a solid presence in Asia as compared to its Australian peers. Management has also addressed the investors’ concerns over China growth, by reaffirming the China’s growth outlook over 7% to 7.5% per year.ANZ recently entered into a $450 million technology deal with IBM for five years, wherein IBM would be offering technology to support its super-regional Asian strategy. The bank would leverage the entire portfolio of IBM's products. ANZ has an annual budget for technology spending of $1.5 billion and intends to invest on expanding its networks in Asia, especially in China.
ANZ Daily Chart (Source - Thomson Reuters)
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Stable earnings performance: The bank managed to deliver a decent performance despite the CET1 ratio impact, wherein the group’s cash profit rose 4.3% yoy to $5.4 billion in the nine months ended on June 30 of fiscal year of 2015, while the Profit before Provisions surged 5.1% as compared to the corresponding period of earlier year. The statutory profit improved 11% yoy to $5.6 billion in 9M15, against $5 billion in pcp, driven by the improved customer franchises across Australia, New Zealand and Asia Pacific. Customer deposits witnessed solid performance, surging by 9.5% on a year over year basis, driven by net loans and advances increase by 7.7% yoy during 9M15. The bank’s gross impaired assets reduced 3% yoy during the period, but the total provision charge increased to $877 million. The group estimates its impairment charge to increase further to around $1.2 billion, or 21 bps for the total fiscal year of 2015, against 19 bps in FY14. Meanwhile, ANZ’s liquidity coverage ratio rose to 121% in nine months ended on 2015 as compared to 119% in the corresponding period of last year. As per the divisional highlights, the bank’s Australia division delivered better lending and deposit flows, stable margins as well as improved its customer base by over 5%, driven by home lending and credit cards increase in retail business. Better lending growth, specifically for small business contributed to the Commercial businesses growth in 9M15. The global markets business income rose 6% yoy to $1.8 billion during the nine months ended on June 30 of fiscal year of 2015, while the customers for International and Institutional Banking improved 9% yoy, boosted by Asian business. Cross border payments represented over 25% of the institutional total customer revenues as of first half of 2015.
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Provision charges and impaired assets (Source: Company Reports)
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Stock Performance: Australia and New Zealand Banking Group’s shares have tumbled over 17.5% in just last four weeks, partly owed to the slowdown in China. We believe that this correction have placed this bank at even more cheaper valuation trading at an attractive P/E of 10.3x as compared to National Australia Bank Ltd.(ASX:NAB) P/E of 12.6, Commonwealth Bank of Australia (ASX:CBA) P/E of 13.3x and Westpac Banking Corp (ASX:WBC) P/E of 12.7x. The banks is also a strong dividend player, with a yield of 6.7%. We remain bullish on the stock and reiterate our “BUY” recommendation at the current levels of $26.86
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