Let’s Be Frank

The second-half FY19 result from Australia and New Zealand Banking Group did not contain much good news, with pre-provision profit of $4.577bn missing Ord Minnett’s already below-consensus forecasts by 2% due to lower-than-expected revenue and higher-than-forecast costs. A final dividend of $0.80 per share was declared, as expected.

 

Net interest margin (NIM) pressures were particularly acute – group NIM, excluding one-off items and the markets business, fell 5.0 basis points (bp) in 2H19. This largely reflected pressure from central bank rate cuts, which had a 6bp impact, but divisionally the pain was mainly in the institutional operations and the New Zealand business. NIM headwinds are largely expected to continue into 1H20, particularly given recent monetary policy easing globally.

 

These factors, combined with a number of cost headwinds and more subdued expectations for markets income, have led us to make material downgrades to our earnings forecasts. We have cut our cash EPS forecasts by 7% and 5% in FY20 and FY21, respectively, with lower revenue, i.e. a greater decline in FY20 NIM, and higher costs equally responsible for the change.

 

One of the main surprises to come from this result was the announcement that ANZ would cut the franking level of its dividend to 70% from 100%, reflecting the continued decline in the statutory earnings contribution from Australia, which fell to 55% in FY19 (versus the 76% dividend payout ratio), and the bank’s nil franking credit balance.

 

ANZ’s valuation of 12.5x FY21E earnings looks cheap versus the other major banks at 13–15x, but we consider this discount is justified given a number of challenges and significant execution risk. Cost savings are also looking more uncertain and capital management is little more than a distant possibility.

 

Overall, we maintain our Hold recommendation, but have lowered our target price to $26.40 from $27.70.

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