- ANZ has reported FY17 cash earnings of $6.936bn, 1.5% better than our forecast and a touch lower than consensus. The beat relative to our numbers was driven by credit impairment charge being lower than expected.
- We had been less optimistic than consensus about the revenue and profit before provisions (PBP) outcomes. Even still, revenue has come in weaker than our forecast and PBP is in line.
- The performance of the institutional business, which has been one of the key focuses of remediation, remains underwhelming.
Soft profit before provisions outcome
Profit before provisions (PBP) for FY17 is in line with our expectations and we were less optimistic than consensus on this front. It should also be noted that PBP is in line despite the timing of the completion of sales of the Retail and Wealth businesses in China, Singapore and Hong Kong being later in 4Q17 than we expected. We were expecting a PBP hole of $50m in 4Q17 as a result of the completions, however the hole ended up being $19m due to timing differences.
Performance of Institutional remains underwhelming
ANZ had set out to reduce credit risk weighted assets (CRWA) of the Institutional division of approximately $45bn as part of its capital rebalancing strategy and efforts to improve the Return On Equity (ROE) to 13%. Institutional CRWA have now been reduced by $46bn since Sep-15, however we calculate that the RocCET1 of the Institutional division in 2H17 was only 10.4% despite the division's profit benefitting from a credit impairment release in 2H17.
The result supports our view that the 13% ROE target will be very difficult to achieve. However, ANZ is still sticking with the target, suggesting it can achieve it largely through cost-out. Even if we assume the level of credit impairment release experienced in 2H17 continues, we calculate that the cost base of the Institutional division will need to be reduced by over 20% to achieve the 13% ROE target. The Net Interest Margin (NIM) of the Institutional division decreased by 9bps from 1H17 to 2H17, and it reduced by 14bps after excluding Markets.
We continue to believe that the unintended loss of high value customers may be contributing to the poor NIM and ROE outcomes of the division.
Capital management gets a mention
ANZ has reported an APRA CET1 capital ratio of 10.6% at 30/09/2017, above APRA's 'unquestionably strong' benchmark of 10.5%. ANZ has said that, in 2018, as it receives proceeds from completion of divestments it will have the flexibility to consider capital management initiatives. We have brought forward our forecast timing of share buybacks. We are now forecasting buybacks totalling $4bn to be conducted in 2H18 and 1H19.
Investment view and changes to forecasts
We have increased our cash earnings per share (EPS) forecasts by 1.6% in FY18F and 0.9% in FY19F, largely due to lower credit impairment charge forecasts and bringing forward forecast timing of buybacks. Key downside risks for ANZ include increased funding costs and greater-than-expected asset quality deterioration.
We retain our Hold recommendation.
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