Can Institutional Banking Spur Growth At ANZ?

Australia | Nov 01 2019

ANZ Bank's FY19 result confirmed the challenges faced by a banking sector that needs to find new areas of growth while grappling with narrowing interest margins.

-Cost reduction targets is likely to require more investment
-Difficulties persist with Australian loan growth
-Franking on dividends reduced to 70%


By Eva Brocklehurst

As the first of the three major banks to report its financial results this month ANZ Banking Group ((ANZ)) encompassed the broad scope of market concerns and will face another difficult year. Further investment is considered likely in order to sustainably reduce the bank's cost base.

Morgan Stanley forecasts underlying revenue to fall -3.5% in FY20, with negative operating leverage driving a -10% decline in pre-provision profit. The broker also forecasts a -10 basis points decline in margins.

Regulatory costs are likely to remain elevated, in Credit Suisse's view, while the pick-up in housing finance applications may not flow through to overall credit growth because of a higher paying down of mortgage debt by borrowers.

FY19 cash earnings were $6.47bn, below most expectations, driven by lower net interest margins. Morgans actually found the results better than feared as costs, asset quality and capital were all pleasing elements.

On a mildly positive note too, softer revenue was offset by lower-than-expected bad debts and Credit Suisse points out earnings quality was enhanced by a higher effective tax rate, albeit affected by declining provision coverage.

The bank has confirmed its medium-term (FY22 exit) cost base target of $8bn which UBS considers positive, provided cost reductions are undertaken in the correct manner and do not disrupt the franchise.

Morgan Stanley believes the cost target will require more investment and also a material reduction in the bank's footprint as well as a reshaping of the workforce. This could then create a risk of further losses in market share if peers do not take the same path.

Macquarie agrees that it will be difficult for ANZ Bank to materially outperform peers on costs without damaging the franchise. This view is reinforced by the first half FY20 expense guidance of around 4%, ahead of possibly more remediation and restructuring costs.

The bank is lowering its hurdle rate to increase growth opportunities, particularly in institutional banking as this will offer potential for faster growth. Citi considers this the right strategy, as institutional banking was already growing at 7% and offers high single-digit returns, not too dissimilar from the front-book (new customer) mortgages that peers were chasing.

Sector Implications

Morgans assesses investors are adopting negative views on net interest margins for the other major banks as a result of ANZ Bank's disappointing performance. This may be unjustified, as the broker calculates the retail net interest margin in Australia actually increased in the second half, with positive implications for more retail-oriented banks.

Morgans believes the main problems for ANZ Bank lie with the institutional and New Zealand divisions, and more specifically the compression being generated in margins on deposits in these divisions. The broker suspects official rate reductions, both domestically and offshore, pose a greater problem for ANZ Bank because of the nature of its markets business.

While the FY19 results may be partially a reflection of specific issues related to ANZ Bank, Macquarie still asserts the underlying pressures on the sector remain broad-based. The broker suspects ANZ Bank will need to raise capital levels by around $4bn over the medium term, given pending rules changes from the Reserve Bank of New Zealand, and despite what appears to be a robust pro forma CET1 ratio of 11.5%.


The bank has warned that loan growth is unlikely to materially increase, despite a housing recovery, stating "volume growth is going to be close to zero".

ANZ Bank has lost market share in mortgages recently, Bell Potter notes, with the mortgage portfolio declining by -$7bn in FY19. The bank has moved to rectify the issue through increasing transparency on policy and risk settings and improving processing and turnaround times.

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