Costs Query

Costs Query | ANZ Banking Group (ASX:ANZ) Recommendation

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

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ANZ Banking Group reported an FY21 cash net profit of $6.2bn, 1.9% ahead of Ord Minnett’s$6.1bn forecast. A fully franked final dividend of 72c per share was declared, resulting in a full-year payout of $1.42 per share, in line with our estimate.

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The second-half cash net profit was 3.7% above our forecast, driven by better Markets income and a provision write-back. Excluding Markets, revenue was directly in line with our forecasts, as was the common equity tier-one ratio which was a strong 12.3%.

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The major disappointment in the result was higher second-half costs (with 2% currency-adjusted cost growth for FY21, at the top end of the guidance range), and guidance for slightly higher costs in FY22. This leaves a lot of work to get to the $8bn cost base “aspiration” target exiting from FY23. Much rides on ANZ cutting investment spending from $1.9bn to $1.4bn inFY22, at a time when some other banks are investing for growth.

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Poor Australian mortgage trends was the other area of weakness, following months of underperformance versus peers on mortgage growth and turnaround times. Management is dedicating more resources to turn things around and a gradual improvement is likely from here. Book growth is not yet positive but this is expected in 1H22, returning towards peer growth levels in 2H22. We think some form of price investment is inevitable.

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After several years of the Institutional business being a source of capital generation for the group, ANZ’s capital rebalancing strategy is completed. Management is now talking about Institutional in growth terms, with an upbeat message on customer activity and leverage to rising interest rates. We agree this business has good rate leverage, although taken as a whole we believe ANZ offers a little more than National Australia Bank (NAB, Accumulate) or Westpac(WBC, Hold) based on transaction account disclosures, while Commonwealth Bank (CBA, Hold) offers best rate leverage.

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We have lowered our FY22 cash EPS forecast for ANZ by 3%, with higher Markets and non-Markets revenue more than offset by higher costs, including remediation. Our FY23 estimate remains unchanged. We maintain our Hold recommendation, while we have raised our target price to $30.00 from $29.10.