Capital Idea

Australia and New Zealand Banking Group posted first-half FY17 cash earnings of $3.411 billion, slightly below Ord Minnett's forecast of $3.509 billion, primarily due to a circa $100 million drag in insurance revenue from adverse disability claims and slightly softer fees.


In line with our expectations, ANZ held its interim dividend at $0.80 per share, representing a payout ratio of around 69%.


Importantly, we also note that the bank's core equity tier-one ratio of 10.1% (or 15.2% on an internationally comparable basis) has allowed it to commence the first stages of capital management by announcing the neutralisation of the dividend reinvestment plan, as well as flagging a further 65-70 basis points of capital to be delivered by the end of FY17 from further asset sales. This leads us to increase our forecast for share buy-backs to $4 billion from $3 billion, commencing with the FY17 result.


Following the first-half FY17 result, we have downgrading our FY17E earnings by about 2% on largely transitory factors. Accordingly, we leave our FY18 and FY19 earnings forecasts largely unchanged.


The foundations of our investment thesis on ANZ remain in place – the bank’s different approach to costs, in that it is looking for absolute reductions as opposed to just managing to a so-called positive jaws outcome (where revenue growth outpaces cost growth); an improving risk profile; and a significantly superior capital position to its peers.

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