WEEKLY STOCK COMMENT: ANZ
Roy Davidson, 20 September 2018
ANZ operates in the retail and business banking sectors in Australia, New Zealand, the South Pacific and Asia. Australian operations make up the largest part of ANZ’s business and include personal banking, corporate banking and wealth management.
While it has recently been reducing its exposure to the region, ANZ remains the only major Australian bank with a material exposure to the long-term growth opportunities available in Asia, with the other three banks having largely chosen to focus on their core operations in Australasia. New CEO, Shane Elliot (previously CFO of the Group), is reducing the Group’s exposure to the region by winding down lower returning businesses that require high capital commitments. In addition, parts of the Asian wealth management business have been divested. These funds will be reinvested into credit growth in the core, higher returning, Australasian business.
Since the global financial crisis, the capital position of large dominant banks has been a focus for regulators across the globe. The Basel Committee on Banking Supervision has upped the ante on regulatory capital requirements in order to increase the strength and resilience of the global financial system. In response, the Australian regulator has determined what it sees as the appropriate level of capital to be ‘unquestionably strong’ – 10.5% by 2020. The major banks have been increasing their capital levels for some time (e.g. by selling assets, dividend reinvestment plans, capital raises etc.) and are well placed to meet the new requirements. ANZ remains the best placed amongst the majors following its Asian and wealth divestments with capital returns underway.
We expect credit growth to slow over the next few years, especially in mortgage lending. With top line growth harder to come by, competition should intensify, with less scope for banks to pursue mortgage repricing initiatives (which boost margins). Mortgage repricing has been a key driver of earnings in recent years and consequently, we see limited earnings growth prospects in the sector.
The outlook for the major Australian banks has become more challenged in our view, and despite recent weakness in share prices in the sector, we remain cautious. We expect credit growth to slow from here and the property market remains a big risk. In addition, the Australian Government’s Royal Commission inquiry into the sector presents a range of risks while the recently enacted banking sector levy will impact profits. We suggest reducing exposures but see ANZ as the most attractive sector exposure given its higher earnings growth profile as it improves the efficiency of its operations.
Risks to ANZ include:
- increased competition
- regulatory change
- housing market downturn