Overreaction | ANZ Banking Group (ANZ) Recommendation

Ord Minnett Research Recommendation: ANZ Banking Group (ASX: ANZ)  

ANZ Banking Group reported a first-half FY21 cash net profit from continuing operations of $2.94bn, 11% above Ord Minnett’s forecast due mainly large net provision write-backs. A fully franked interim dividend of 70c per share was declared, in line with our estimate.

The result was harshly dealt with by the market, in our view, with the share price falling 3% following the result announcement versus average major bank peers rising 1%. We think this largely reflected unrealistic expectations regarding ANZ’s $8bn cost aspiration and markets division income. We made the following observations:

• As expected, the result confirmed stronger core banking revenue growth, which rose 2% half-on-half (HoH), excluding a couple of small gains on sale, versus Westpac (WBC, Hold), which increased 1%.
• Australian home loan growth has lost momentum, while New Zealand lending was strong.
• The net interest income to average capital risk-weighted assets ratio improved in all divisions HoH, excluding the markets business.
• The Institutional arm also continued to spin off material amounts of capital, with the common equity tier-one ratio now a very healthy 12.4%, about 50bp above our forecast.

ANZ’s net interest margin (NIM) excluding markets rose 3bp HoH, driving 2% core banking revenue growth. Westpac’s NIM also increased 3bp, although ANZ’s outlook appears stronger given: 1) less mortgage headwinds; 2) less replicating portfolio headwinds; and 3) a stable institutional business outlook. Balance sheet growth prospects are more robust for Commonwealth Bank (CBA, Hold) and National Australia Bank (NAB, Accumulate), in our view, although this mostly reflects institutional run-off which is supporting group returns.

We have reduced our pre-provision profit forecasts by 3% in FY21 and 1% in FY22 due to higher costs, while our FY23 estimate remains unchanged. Our net profit forecasts have lifted 10% in FY21, and 4% in FY22 and FY23 due to lower impairment expenses. We have increased our EPS forecasts further as a result of lower dilution from capital instruments and our higher FY22 buyback estimate of $4bn. We maintain our Accumulate recommendation, while we have trimmed our target price to $30.00 from $30.40.