- ANZ reported 1H18 cash earnings broadly in-line with our forecast. An interim dividend of 80 cents per share fully franked has been declared (in line with our expectations).
- Asset quality and capital were strong points of the result. We reiterate our view that continued benign asset quality conditions pose upside risk to FY18 earnings forecasts for the sector.
- We believe Net Interest Margin expansion in the Australia and New Zealand divisions bodes well for the 1H18 results of the major banks yet to report.
- The result supports our base case that the major bank sector's ordinary dividend yields are sustainable over our forecast period.
Australia and NZ NIM expansion bodes well for upcoming reporting
The Australia division's Net Interest Margin (NIM) expanded from 273bps in 2H17 to 278bps in 1H18 despite the full period impact of the major bank levy. NIM expansion for the Australia division was largely driven by improved deposit margins, impact of home loan re-pricings and reduced wholesale funding costs. We believe the dynamics seen in ANZ's NIM movement in Australia and NZ bodes well for upcoming major bank 1H18 results.
The key disappointment in ANZ's NIM stemmed from the Institutional business, and we view this factor as being specific to ANZ.
Asset quality and capital strong points of the result
In overall terms, ANZ's asset quality improved from Sep-17 to Mar-18 with a significant reduction in gross impaired assets over this period and a significant reduction in new impaired assets from 2H17 to 1H18. The 1H18 credit impairment charge was better than we expected. The capital front was also strong, with ANZ reporting a better-than-expected CET1 ratio of 11.0%.
Consequently, we have increased our total share buybacks forecast from $6.4bn to $6.9bn. $1.1bn of this buyback was conducted in 1H18.
Still much to do to improve Institutional Division
ANZ set an aspirational ROE target of 13% at the commencement of its capital portfolio rebalancing program. However, we calculate that the division is still delivering an ROE of less than 10%. ANZ has said that it will look to drive further capital efficiency in this division and continue to focus on cost out. However, we believe it will be a struggle to achieve the 13% ROE target any time soon.
We have not materially changed our EPS forecasts and our 12 month share price target remains unchanged. Key downside risks include increased funding costs and greater-than-expected asset quality deterioration.
We retain our Add recommendation.
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