The House of Elliott

ANZ reported FY17 cash earnings of $6,938m, slightly below Ord Minnett’s forecast of $7,028m and consensus of $6,944m. A final dividend of $0.80 per share was declared, as expected, representing a 67% payout ratio.

 

Overall, we viewed the result as a slightly weak, although this was partially accounted for by a slowdown in the Markets business. Importantly, ANZ continued to strengthen its capital position, with already announced divestments expected to provide a further benefit over FY18.

 

  • ANZ’s 2H17 net interest margin declined another 2bp to 198bp, due mainly to the major bank levy and weak performances across the Markets business. This, however, ignores the impact from de-risking of the institutional book, which contributed to the further step down in its average portfolio credit risk weight.
  • The bank reduced its costs by 1% in FY17, excluding large items. With the revenue environment becoming increasingly challenged, highlighted most recently by the removal of ATM fees, ANZ's focus on costs should help drive future EPS growth.
  • As expected, ANZ further consolidated its capital position, adding another 40bp in 2H17. On a pro-forma basis, we now see the bank’s common equity tier-1 ratio improving to 10.6% by FY19, despite our continued inclusion of a $4bn buyback commencing in 1H18, at a run-rate of $1bn per half.

The result provided a further opportunity to gauge the progress ANZ has made towards restructuring its business. Given an increasingly challenged revenue environment, ANZ’s disciplined approach to costs should provide a valuable growth driver. Further, its work to reduce the risk across its portfolio should help the bank continue consolidating its capital position, giving us greater confidence it will commit to the $4bn share buyback to commence in 1H18.

 

Despite ANZ’s small miss on earnings, we saw no evidence to change our investment thesis. We remain optimistic on the bank’s medium-term prospects despite a challenged revenue environment, which has seen greater scrutiny of the banks. We expect any announcement from the Australian Prudential Regulation Authority on its final risk weight settings to provide a relative benefit to ANZ versus some of its peers that have a larger exposure to investor loans.

 

We maintain our Accumulate recommendation on ANZ with a $32.00 target price.

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