ANZ Banking Group delivered first-half FY18 cash earnings of $3.493bn, 3% below our forecast of $3.609bn due primarily to Markets income that was much softer than expected. The bank continued to show good progress on the key facets supporting our positive view on the stock.
We estimate ANZ is likely to deliver strong EPS growth of about 5% over the next three years, supported by ongoing buybacks and an attractive valuation. We maintain our Accumulate recommendation on ANZ with a $31.20 target price.
- 1H18 result – ANZ’s first-half net profit was affected by a weak Markets result, which contributed to a 2% miss at the revenue line versus our estimate. Management attributed this to tough trading conditions, noting that volatility remained relatively low over the half. This could be traced to materially weaker results in the Franchise Trading business, which reported a 29% decline in its revenue HoH, broadly consistent with the revenue decline in Australian Markets.
- Risk-adjusted returns – ANZ continued to make progress on risk-adjusted returns, with the net interest income to average credit risk weighted assets ratio – excluding Markets – up 5bp HoH and improving in all divisions. We also estimate the pre-provision profit to average risk weighted assets ratio improved 2bp HoH, even after including the headwind from Markets. We believe risk-adjusted measures are the key signposts for assessing ANZ, and progress here was pleasing.
- Cost savings – ANZ’s expenses fell 2% HoH, or 0.2% excluding large and notable items. A key to this improvement was a large decline in premises costs. Personnel costs were flat HoH, but we think the second half will see a material decline with significant pull-through from the $78m restructuring program taken in the first half.
Asset quality and capital – ANZ’s first-half common equity tier-1 ratio was a very strong 11.0%, or 11.8% on a pro-forma basis when announced divestments complete. With a 180bp pro-forma buffer to the regulatory minimum, we have factored in $6bn of buybacks over the next three years. Asset quality also looked very clean, with a significant reduction in gross impaired and new impaired assets HoH.