Revenue Star

Ord Minnett Research Insight: ANZ Bank (ANZ)

Australia and New Zealand Banking Group delivered the strongest revenue performance of the major banks this reporting season, with revenue excluding markets up 4% – versus National Australia Bank (NAB) up 1%, and Westpac (WBC, Hold) down 1%, in the December quarter, and Commonwealth Bank (CBA, Hold) up less than 1% in the first half of FY21.

ANZ’s net interest margin surprised to the upside, up 5.0 basis points (bp), or up 3bp excluding markets balance sheet activities, benefiting from better institutional spreads, lower funding costs, and positive mix impacts.

Costs were arguably the only disappointing feature of the result, coming in flat on the second-half quarterly average, but the cost-savings rhetoric remains and we continue to back the bank given its strong track record.

ANZ benefited from -$150m in net write-backs this quarter which, when combined with positive credit risk migration*, saw a strong capital performance – the common equity tier-one ratio was 11.7% or 11.8% on a pro forma basis. ANZ joins the other banks in showing potential for capital management, albeit New Zealand’s increased capital requirements may consume some of the capital surplus. We have factored in $3bn of capital management in the second half of FY22.

Our cash earnings forecasts have increased by 27% in FY21, 8% in FY22, and 5% in FY23, due to lower bad debts and higher revenues. Cash EPS has lifted by a greater amount due to the share buyback. Pre-provision profit forecasts have increased by 7% in FY21, 5% in FY22 and 3% in FY23.

Despite stronger-than-peer share price performance over the last 12 months, we still see good potential upside, with returns well-managed and the shares still trading at a discount to peers. We maintain our Accumulate recommendation but have raised our target price to $28.20 from $26.20.

* Credit risk migration is where a bank's credit risk-weighted assets (loans) move from one risk rating to another, thus changing the amount of regulatory capital a bank is required to hold. A move to a lower risk rating for a loan from a higher risk rating (i.e. there is a lower probability of default) reduces the amount of regulatory capital the bank needs to hold. Conversely, a move to a higher risk rating from a lower risk rating (i.e. there is a higher probability of default) increases the amount of capital a bank must set aside.