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Treasure Chest: ANZ Vulnerable To Pressures

Treasure Chest | Mar 15 2019

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. ANZ Bank is facing challenges in its Australasian retail & business banking leading a number of brokers to downgrade the stock.

-Likely to take time to turn mortgage volume growth around
-Capital management likely to pause until more clarity on RBNZ proposals
-Challenge ahead in keeping costs from rising

 

By Eva Brocklehurst

Over the course of the Hayne Royal Commission the smallest of the four major banks, ANZ Bank ((ANZ)), appeared to withstand the scrutiny and subsequent criticism better than its peers.

However, a difficult operating and regulatory environment has created execution challenges and, as Morgan Stanley points out, housing loan and deposit growth is below system. ANZ's mortgage volume growth turned negative in the first quarter of FY19, amidst changes to responsible lending policy and a renewed emphasis on owner-occupied principal & interest loans.

Credit Suisse does not believe ANZ's subsequent announcement that it has been too conservative in its approach to mortgage lending is an immediate inflection point for growth and the earliest there is likely to be a change is at the end of this year.

Morgan Stanley forecasts around 1.5% underlying revenue growth in FY19, despite assuming a 10% rebound in markets income, higher wealth revenues and flat banking fees. The bank's credibility on cost management has been enhanced recently but is still unlikely to beat the broker's forecasts for a -1% decline in underlying expenses this year.

ANZ has lowered its risk profile, with fewer Asian retail, emerging corporates and Australian consumer unsecured loans. Yet, Morgan Stanley expects loan losses to rise as the bank's collective provisions coverage is lower than peers and the Australian economic outlook is weak. The stock's multiples provide little margin for error, in the broker's view, making it vulnerable to downgrades.

Challenging trends within the Australian division present a risk to revenue, in Macquarie's opinion, and the bank needs to improve its performance to deliver underlying revenue growth that is in line with its peers. The broker accepts more conservative lending standards have been a driver of lost market share and proactive steps to reduce expenses could also have played a role.

Capital Uncertainty

ANZ's CET1 ratio should reach 11.5% in FY19 but the capital proposals from across the Tasman at the Reserve Bank of New Zealand create uncertainty, several brokers believe. Credit Suisse, in reflecting on the RBNZ proposals, believes that at a minimum, ANZ's future capital management will be paused until there is greater certainty.

While additional capital in a subsidiary does not necessarily require additional capital at a group level, the application of a risk weight floor and associated increase in risk weights does flow through to the group, the broker asserts.

ANZ, Citi  assesses, is likely to have a relatively larger increase in capital because it has a lower mortgage risk weight versus its NZ peers. The broker revises down estimates for FY19 earnings by -1% to reflect softer revenue because of lower volumes. FY20/21 estimates are reduced by -5% to reflect this, as well as the impact of delayed capital returns. However, the broker's expectations for long-term capital returns are unchanged.

Morgan Stanley agrees there will be a pause in ANZ's capital management after the existing $3bn buyback concludes this month, and any further buybacks or capital management initiatives will be delayed until 2020.

Costs

Macquarie has been pleased with the way ANZ managed its expenses in FY18 and expects expenses will be maintained at a broadly similar level in FY19. Still, pressure on expenses is likely to re-emerge later in the year and may require ongoing restructuring charges.

In the light of how potential litigation and conduct costs can quickly add up, Bell Potter has come to the view that its operating expense forecast for ANZ after 2020 may be on the low side. Hence, taking a conservative tack, the broker increases these forecasts by around 5% from 2021 to maintain the overall cost base at $9.2-9.3bn.

This maintains the elevated cost base trend in line with Commonwealth Bank ((CBA)) and Westpac ((WBC)). The net impact is a -4-5% downgrade to continuing cash net profit in the outer years. The broker, not one of the eight monitored daily on the FNArena database, reduces the target to $28.50 from $29.80 and a downgrade to a Hold rating from Buy is now considered more appropriate.

Morgan Stanley is the most recent on the database to downgrade the stock, to Underweight from Equal-weight, following downgrades to Neutral by Macquarie, Citi and Credit Suisse within the past month.

The database still has two Buy ratings (Morgans, Ord Minnett), with five Hold and one Sell (Morgan Stanley). The consensus target is $28.29, suggesting 6.3% upside to the last share price. The dividend yield on FY19 and FY20 forecasts is 6.0% and 6.1% respectively.

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