Australia | Mar 29 2016
This story features AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: ANZ
-Single party resource exposures dominate
-ANZ likely to accelerate Asian pull-back
-Confidence in ANZ dented
By Eva Brocklehurst
ANZ Banking Group ((ANZ)) has stirred the pot on credit risk with a further increase in bad debt charges, provoking renewed negativity surrounding the banking sector.
Just five weeks after its first quarter trading update signalled a hike in bad debts, recent individual company credit events have been added. Coal Miner Peabody Energy Australia missed an interest payment last week and Arrium ((ARI)), in announcing a recapitalisation plan late February has, Ord Minnett suspects, caused ANZ to take a provisioning top up.
ANZ is not alone in these exposures but Peabody missing its payment is considered the likely catalyst for the bank announcing an additional $100m exposure, which adds to its earlier guidance of charges being a little above $800m.
Ord Minnett observes both Westpac ((WBC)) and National Australia Bank ((NAB)) hold exposures of similar magnitude. While recent refinancing from Glencore and a recovering share price for Noble Mining are positive international aspects in the current resources malaise, Ord Minnett expects further pressures from domestic exposures.
Aurizon ((AZJ)) is likely to endure some pressure on its debt provisions as a consequence of the problems with Peabody. The broker notes each of the major banks hold $50m in exposure to Aurizon's $490m debt tranche maturing in 2021. NAB has further exposure to failed retailer Dick Smith Holdings, while, along with Westpac, NAB is among five other lenders in a syndicate to troubled law firm Slater & Gordon ((SGH)). Ord Minnett expects the sector's share prices will be under pressure heading into reporting season in May.
Westpac also delivered an update in its consumer and business bank briefing and signalled bad debt charges were rising. Credit Suisse notes some asset quality deterioration in automotive finance but believes the pressures continue to reflect the usual “hot spots”. Westpac has highlighted rising arrears in Western Australia and suggested five single name exposures could present losses for the sector.
Goldman Sachs, at this stage, believes the deterioration in asset quality is largely isolated to specific resource exposures, but nevertheless is not exclusive to just Westpac and ANZ. Larger domestic resource syndicated loans usually have at least three major banks participating. The broker suspects the market is pricing the deterioration as an ANZ-specific issue, and Westpac's announcement suggests this is not the case.
ANZ remains the broker's preferred bank stock, with a Buy rating. Goldman Sachs, not one of the eight stockbrokers monitored daily on FNArena's database, retains an Neutral rating for the other major banks.
Brokers note that Westpac does have an advantage in the current environment with its heavy exposure to NSW and Victorian mortgages, as these states are currently enjoying the strongest economies. Westpac expects consumer bad debt charges should be 10% or $24m higher than the previous corresponding period, which is lower than UBS expected.
Both UBS and Deutsche Bank are a little more concerned about ANZ's update as this is not the first time in the last 18 months that the bank has underestimated the bad debt charge and been forced to revise estimates. UBS expects the charges will stay around current levels over the second half and 2017 but could be materially higher if Asia experiences a hard landing.
The broker expects ANZ will accelerate its pull-back in Asia, with a base case of $30bn in additional institutional business being exited by FY18. The revenue impact is expected to be largely offset by a significant cost cutting program.
Maintaining a steady dividend is becoming increasingly challenging and any further signs of asset stress or economic deterioration would likely force the board to cut its dividend, the broker suspects. The stock does not appear expensive but UBS finds few catalysts for outperformance until ANZ can demonstrate both a stabilising of bad debts and a successful pull-back in Asia.
Despite the fact this is about single names rather than a worsening credit environment, Deutsche Bank believes it suggests both limited visibility on bad debt and potential for further charges given ANZ's overweight position in resources and institutions. The prospect of the bank closing the valuation discount to its peers in the short term is low, the broker believes.
Deutsche Bank downgrades ANZ to Hold from Buy. Ordinarily, the broker believes. the news would not be a huge cause for concern as the provision represents just 1.0% of post tax profit but ANZ has surprised several times on its bad debts, and this is an environment where companies that disappoint are dealt with harshly.
ANZ has overweight exposures in several areas such as NZ dairy, Asia and Western Australia's housing portfolio and should two more more of these categories deteriorate simultaneously it could mean more downside risk to earnings, the broker maintains.
Macquarie is also concerned that ANZ's guidance changed over a relatively short period, despite the overall credit environment being broadly stable. The broker expects the market will continue to question the bank's differentiation in terms of credit quality to that of its peers.
While the issues for ANZ are likely to be company specific, ongoing commodity price weakness is expected to translate into higher losses for the sector, with Macquarie observing ANZ and Commonwealth Bank ((CBA)) are most exposed.
Macquarie's syndicated loan data suggests that ANZ and CBA have lower quality institutional exposure relative to peers, partly from higher exposure to energy and resources. This appears to counter Goldman Sachs' observations, which estimate ANZ has the largest at-risk exposure to resource syndicated loans and CBA the smallest.
Morgan Stanley believes ANZ's new CEO, Shayne Elliott, should cut the dividend and strengthen the balance sheet as priority. The bank is in an earnings downgrade cycle driven by loan losses and the broker lowers forecasts by a further 2.0%. ANZ has the highest risk profile of the major banks because of its business mix, rate of growth and risk appetite in Australian non-housing loans, and its broad Asian institutional lending exposure, in Morgan Stanley's view.
ANZ has four Buy ratings, three Hold and one Sell (Morgan Stanley) on FNArena's database. The consensus target is $26.44, suggesting 12.6% upside to the last share price. This compares with $26.72 ahead of the announcement. Targets range from $22.50 (Morgan Stanley) to $32.75 (Citi).
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For more info SHARE ANALYSIS: ANZ - AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED
For more info SHARE ANALYSIS: AZJ - AURIZON HOLDINGS LIMITED
For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA
For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED
For more info SHARE ANALYSIS: SGH - SLATER & GORDON LIMITED
For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION