Strict Discipline

ANZ Bank has posted 5% growth in profit before provisions on a year ago in the nine months to 30 June, driven by improved returns from its underperforming institutional business and discipline on mortgage pricing.


Reducing the amount of low-returning assets in the institutional operations lifted underlying margins in that division by 5.0 basis points. Meanwhile, the 6.0 basis points re-pricing of the mortgage book with the May cut in the RBA's official cash rate, and the avoidance of competitive discounting on home loans, supported domestic retail margins.


In ANZ's markets business, income for the first nine months of the year was in line with expectations, with the June-quarter performance ‘average’ relative to the past five years.


Ord Minnett expects ANZ's bad and doubtful debt provisioning to remain elevated in the September quarter. Given the June-quarter outcome of $482 million, our numbers imply a further $433 million in provisioning in the last quarter of the bank's fiscal year. Elevated loss rates in the Asia, Pacific, Europe and Americas business are the primary driver of higher provisioning levels. We expect this to moderate into FY17 as the run-off of the emerging corporate book nears completion.


We see ANZ’s core equity tier-one (CET1) ratio at 9.5% by 30 September and forecast a 10% CET1 ratio by FY18 with minimal DRP participation. We note that ANZ's rebased payout ratio and risk-weighted asset optimisation provides it with more flexibility than its rivals to deal with higher capital requirements.


Looking ahead, Ord Minnett expects ANZ, under new CEO Shayne Elliott, to continue its strategy of reducing low-returning exposures and focusing on efficiency gains. We maintain our Accumulate recommendation and our target price of $27.50.

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