Credit Where It’s Due

Credit Where It’s Due | 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 released a June-quarter regulatory capital update that was mostly positive, in Ord Minnett’s view. Capital was a little disappointing due to unexpected one-off items, but credit quality trends were very positive with quarterly individual provision expense at record lows.

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Australian mortgage growth has been disappointing, although we expect a gradual improvement from the fourth quarter. New Zealand growth helped to fill the void this quarter.

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ANZ is slightly more exposed than the other major banks to markets income and, while no information was provided, we suspect performance from the Markets division was soft this quarter due to subdued volatility.

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ANZ normally guides to total Markets/Treasury income of $2bn, a little higher than normal performance for National Australia Bank (NAB, Hold) and Westpac (WBC, Hold), which both averaged $1.8bn over the FY17–20 period. We estimate NAB’s Markets/Treasury income declined 28% in the June quarter, and we suspect ANZ has seen similar trends, although we note it has a broader business across geographies (Asia and New Zealand) and products (credit and commodities, in addition to currency and rates). We assume a 25% reduction in the Markets contribution for ANZ in the second half of FY21, and a weaker than normal performance in FY22 and FY23.

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The Reserve Bank of New Zealand (RBNZ) did not lift the official cash rate this week, but in creases are only a matter of time and ANZ offers the greatest leverage to this. Combining this with cost savings and capital management, we see a path to solid core earnings growth and an improvement in return on tangible equity, which makes valuation look undemanding.

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We have lifted our cash EPS forecasts by 2% in FY21, with lower impairments more than off setting lower Markets income, and 1% in FY22 and FY23 due to increased net interest margin(NIM) on RBNZ rate leverage and lower Markets income. We assume second-half underlying NIMfalls 2bp half-on-half, or rises 1bp excluding Markets and the impact from higher liquid assets. We maintain our Accumulate recommendation and have raised our target price to $30.60 from$30.00.