Stocks’ Details

Australia and New Zealand Banking Group Limited (ASX: ANZ)

Improving Capital Position: Australia and New Zealand Banking Group Limited announced its 2018 half-year results, entailing 14% rise in statutory profit after tax, $3.49b of cash profit (up 4%), 119.4c of cash earnings per share (up 4%) and 80 cents of Interim Dividend per Share Fully Franked. Australia’s cash profit was up 9% to $1.9b with revenue up 5% to $4.9b. ANZ New Zealand delivered a statutory profit of NZ$964 million, up 11% on the corresponding half in the 2017 financial year, and a cash profit of NZ$941 million, up 1% from the prior comparable period. The bank is delivering consistent performance through a focus on outstanding customer experience and sustainable growth. ANZ has grown in home lending and deposits, which reflects the continuing strength of the New Zealand housing market and of the economy generally. ANZ New Zealand remained the number one bank in brand consideration for local banks and continued to grow its customer base. ANZ New Zealand’s revenue increased 3% to NZ$2.11 billion comprising net interest income of NZ$1.57 billion, up 2%, and other operating income of NZ$535 million, up 4%. Net interest margins increased slightly in the first half of FY18 due to stabilising funding costs and repricing of home loans. Customer Deposits and lending went up by 5 per cent and by 3 per cent, respectively. ANZ group’s return on equity increased to 11.9 per cent in the half year from 11.6 per cent in the previous corresponding period.

    
Capital Equity Ratio Trend (Source: Company Reports)

Capital ratios have increased in the half to March 2018 mainly due to cash earnings generation and benefits from the settlement of asset disposals (Shanghai Rural Commercial Bank, Asia Retail assets and 20% stake in Metrobank Card Corporation). These were partly offset by the payment of the September 2017 Final Dividend and completion of $1.1bn of on-market share buy-back. The CET1 ratio is currently more than APRA’s ‘unquestionably strong’ benchmark and well ahead of the 2020 implementation date. Exposure at Default (EAD) was up by $27 billion and amounted to $930 billion. APS 330 (ADI Prudential Standard) was established to implement Pillar 3 of the Basel Committee on Banking Supervision’s framework for bank capital adequacy. New Zealand imputation credits of NZ 9 cents per share will also be attached and will be paid on 2 July 2018. The share price was down by 10.6 per cent in the past six months but after these updates, the share price was up by 2.35 per cent on 1 May 2018. While the bank expects to witness difficult business conditions in the near term given the tight regulations and Royal Commission, the long-term potential seems to be intact with support from key fundamentals. We maintain a “Buy” on the stock at the current market price of $ 27.47.


Exposure at Default (Source: Company Reports)
 

Commonwealth Bank of Australia (ASX: CBA)

Entered into an Enforceable Undertaking (EU) with APRA:Commonwealth confirmed that it will implement all the recommendations contained in the Report of the Prudential Inquiry that has been released lately. Changes have been underway throughout 2017 at Board and operational levels, and have continued this year, helping to rebuild customer and community trust. This includes the process of Board renewal. Together they represent a significant change program and the APRA Report provides the Board with a clear roadmap for the hard work which is still ahead. The Board will now oversee a comprehensive response to APRA, using the Report to assess the adequacy of steps already underway, and to address the additional improvements needed to implement all its recommendations. It will also appoint an agreed, independent reviewer to report to APRA on its progress.


Impact of Capital Adjustment on Common Equity Tier 1 (Source: Company Reports)

In response to the Report, Commonwealth Bank has also entered into an Enforceable Undertaking (EU) with APRA.Some of the key terms of the EU include establishing an APRA-agreed remedial action plan within 60 days with clear and measurable responses to each of the Report’s recommendations supported by a timeline and executive accountabilities for completing each remedial action. CBA will release its Third Quarter Trading Update on 9 May 2018. In early July, subject to finalisation with APRA, CBA will provide a public update on its agreed remediation plan. An estimate of the expected financial cost of this program for the 2019 financial year will be disclosed as part of CBA’s Annual Results announcement on 8 August 2018. In the past three months, the share price has been down by 9.2 per cent and followed by a jump of 1.88 per cent on 1 May 2018 after the release of response to APRA’s Prudential Inquiry. Despite the recent fall, CBA still looks “Expensive” at the current price of $ 73.170, amidst the high level of investigations into the bank.

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