Company Overview: Australia and New Zealand Banking Group Limited provides a range of banking and financial products and services. The Company's segments include Australia; New Zealand; Institutional; Asia Retail & Pacific; Wealth Australia, and Technology, Services and Operations (TSO) and Group Centre. The Company's operations span Australia, New Zealand, and a number of countries in the Asia Pacific region, the United Kingdom, France, Germany and the United States. The Australia division consists of the retail and the corporate and commercial banking (C&CB) business units. The New Zealand division consists of the retail and the commercial business units. The Institutional division services global institutional and business customers. The Asia Retail & Pacific division consists of the Asia retail and the Pacific business units. The Wealth Australia division consists of the insurance and funds management business units. The TSO and Group Centre division provides support to the operating divisions.
 

ANZ Details

With the recent market correction, buying in banks has again come into picture. Given the price to earnings ratio, Australia and New Zealand Banking Group Ltd (ASX: ANZ) is seen to be trading at a reasonable level when compared to Commonwealth Bank and National Australia Bank. A good return is expected to flow from dividends; and overall, the bank can provide steady income over the next one year.
 
Court approved ANZ’s settlement with ASIC over bank trading and the Bank Bill Swap Rate trial: ANZ has received an approval from Federal Court of Australia on its settlement with the Australian Securities and Investments Commission (ASIC) with regards to the attempted unconscionable conduct and compliance controls in the Australian interbank Bank Bill Swap Rate (BBSW) market. In the course of trading on the BBSW market, ANZ has acknowledged that a small number of traders had attempted to engage in unconscionable conduct on ten dates between September 2010 and February 2012. ANZ also did not have adequate policies or systems to monitor trading, and communications of its BBSW traders. Further, there has been no allegation by ASIC of collusion between ANZ and other institutions. During 2016, the Australian Securities and Investments Commission (ASIC) had started court proceedings against ANZ in respect of interbank trading in the bank bill swap (BBSW) market during the period 2010 to 2012. Moreover, in order to resolve the matter, the bank has agreed to pay a $10 million penalty. ANZ has also agreed to make a payment of $20 million to a Financial Consumer Protection Fund and a $20 million payment towards ASIC’s legal costs. Additionally, ANZ will enter into an enforceable undertaking with ASIC, in which an independent expert will be appointed to review controls, policies, training and monitoring of BBSW trading, to avoid any similar situation in future. The financial impact of the agreement was already reflected in the FY17 results and was largely covered by the provisioning held earlier this year.
 
FY17 Financial Performance: For FY17, ANZ has reported a 12% growth in the Statutory Profit after tax to $6.41 billion and a Cash Profit of $6.94 billion, which is a growth of 18% on the prior comparable period. ANZ’s Common Equity Tier 1 Capital Ratio was 10.6%, and has increased 96 basis points (bps). The Return on Equity has increased 159 bps to 11.9% and Cash Earnings per Share grew 17% to 237.1 cents. Moreover, in FY17, ANZ has shifted the capital base to give greater emphasis to the Retail and Commercial businesses in Australia and New Zealand that now account for 53% of the capital, up from 44% two years ago. Further, the bank in FY17 has significantly lowered the interest rate on the low rate credit card, easy?to?understand contracts for small business, has removed ATM fees and reduced home loan interest rates for owner occupier principal and interest borrowers. Additionally, ANZ has extended its leadership position in mobile payments’ market as the bank introduced FitBit Pay, Samsung Pay and instant card replacement for customers with a digital wallet. ANZ has also made the experience for first home buyers easier through the introduction of First Home Buyer Coaches. The acquisition of red online property site RealAs was also done to boost the digital offering in Australia’s property market.
 

FY17 Financial Performance (Source: Company Reports)
 
Disposal of Assets: In FY17, ANZ made multiple agreements to sell a number of assets including its stake in Shanghai Rural Commercial Bank. The transaction was said to be subject to regulatory approvals and will in aggregate release 80 bps of capital. In the second half of the year, ANZ had successfully completed the transfer of three Asian Retail and Wealth businesses to DBS on schedule and within budget. Moreover, in October 2017, ANZ had announced the sale of its OnePath Pensions and Investments and Aligned Dealer Group businesses to IOOF. The completion of the transaction was earmarked for first half of FY19. Also in October, ANZ had announced the sale of the Group’s 40% stake in Metrobank Card Corporation to its joint venture partner Metropolitan Bank & Trust Company (Metrobank). The sale has been indicated to be subject to customary regulatory approvals.
 
Capital position and dividend in FY17: ANZ had declared the Final Dividend of 80 cents per share, fully franked, reflecting a payout ratio of 68% of Cash Profit, moving closer to ANZ’s target fully franked full year payout ratio of 60?65%. Moreover, the APRA CET1 capital ratio as at end of September 2017 was 10.6% (15.8% on an Internationally Comparable basis). This has put ANZ at the APRA prescribed “unquestionably strong” threshold, which is well ahead of the 2020 deadline. In FY17, the organic capital generation was of 229 bps, which was over 50% greater than the average (140 bps) of the past five years. As with the 1H17 DRP, the bank intends to neutralize the impact of shares allocated under the DRP by acquiring an equivalent number of shares on market. It is worth noting that ANZ has a strong funding and liquidity position with the Liquidity Coverage Ratio at 135% and Net Stable Funding Ratio at 114%.
 

Capital Position (Source: Company Reports)
 
Outlook: For FY18, the bank has cautioned about tight competition as well as the effect of regulation including a full year of impact of the Australian bank tax. On the other hand, the bank’s strategy remains to be ahead of the peers by focusing on only those areas where the bank can deliver exceptional customer outcomes, and focusing on real customer needs while delivering a decent return for the shareholders. The bank primarily simplified its strategy to focus on customer needs. ANZ is also maintaining momentum in the home loan and small business franchises to deliver consistent, above-system growth. The bank also continues to reposition the Institutional business, targeting more RWA (Risk Weighted Assets) reductions and better returns. It is currently at the mid-point of executing a multi-year transformation strategy.
 

Strategy for Growth (Source: Company Reports)
 
Stock Performance: ANZ achieved a further $18 billion reduction in Credit Risk Weighted Assets in 2017 leading to a total reduction since September 2015 to $46 billion or 27%. The bank continues to focus on a smaller number of customers in Asia with slow growth witnessed in the region. It has also formed banking relationships with over 250,000 net new retail customers in Australia and New Zealand.  In Australia, ANZ has strengthened the number 3 home loan market share position and launched First Home Buyer coaches, while the home loan accounts exceeded 1 million for the first time. In New Zealand, the bank maintained the number 1 market share position in home loans, while holds a major position in overall brand consideration (at 51%) and enhanced the Retail Net Promotor Score. ANZ improved the small business deposits by 9% in Australia and commercial deposits by 6% in New Zealand. The bank is also focusing on cost control and accordingly reshaping and simplifying the organization, while cutting the full-time equivalent staff by 4%, which comprises 6% reduction in senior management. Moreover, the bank rebalanced the portfolio, with capital allocated to Retail and Commercial in Australia and New Zealand rising by 9% to 53% in 2017 since 2015. The bank also enhanced risk adjusted returns in Institutional, by combining $18 billion reduction in credit RWA while improving earnings’ composition of markets, transaction banking and lending. ANZ is offloading its non-core businesses and minority investments, which would generate an estimated 80 basis points of capital post completion. While revenue trends might look softer when compared to peers, strong capital position and strategy to simplify business and manage expenses are expected to provide long-term value.

The shares of ANZ have corrected in the last three months with a 2.96% slip (as of November 17, 2017), and the stock now trades at a lucrative forward P/E multiple. We give a “Buy” recommendation on the stock at the current price of $29.28, ahead of its Annual General Meeting scheduled for December 2017.
 

ANZ Daily Chart (Source: Thomson Reuters)

Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.