ANZ Banking Group: Structural tailwinds building for Institutional business
About the author:
- Author name:
- By Azib Khan
- Job title:
- Senior Analyst
- Date posted:
- 29 October 2021, 8:00 AM
- Sectors Covered:
- ANZ Banking Group (ASX:ANZ) has reported cash NPAT from continuing operations of $6,198m, which is 3.0% better than our expectation, and also looks to be ~3% better than consensus. A final dividend of 72cps fully franked has been declared, better than our expectation of 69cps.
Australian home lending contraction unsurprisingly disappointing
ANZ’s Australian home lending contracted by 1% from Mar-21 to Sep-21, which is a disappointing but expected feature of the result.
ANZ has said that it has improved processes and added resources to improve home loan turnaround times and that momentum has improved each month for the last few months. ANZ expects to achieve growth over 1H22 and expects to be growing in line with major bank peers by end-2H22.
Outlook for Institutional business improving
With increasing expectations for global rate rises and steepening yield curves, the outlook for the Markets business – which benefits from volatility in interest rate and foreign exchange markets – is improving.
Expectations of increasing global interest rates are also favouring the outlook of the Payment and Cash Management (PCM) business within the Institutional division. This business was delivering revenue of $1.2-$1.3bn pa in FY18 and FY19, but revenue has since trended down to ~$900m pa largely due to lower interest rates. However, we note that revenue for this business was flat from 1H21 to 2H21 and ANZ believes this business has bottomed in terms of the drag from interest rates.
The two other key businesses within the Institutional division are Corporate Finance and Trade. ANZ sees structural tailwinds for these two businesses over the medium term as a result of the transition to a low carbon global economy.
We therefore believe it is conceivable that revenue growth of the Institutional division will outperform ANZ’s other divisions over the next 2-3 years.
Fuel for cost-out sceptics as suspected
While ANZ’s FY21 operating expenses are 0.8% less than we expected, they appear to be ~1% higher than consensus on this front.
ANZ is sticking to its target of an annual operating expense run-rate of ~$8bn pa by end-FY23F, consisting of ~$7bn pa of ‘run the bank’ expenses and ~$1bn pa of ‘change the bank’ expenses.
However, ANZ has said that costs in FY22 will be slightly higher than FY21, which we believe will lead to increased skepticism about ANZ being able to sustainably meet its end-FY23F cost target. Our base case is that ANZ will sustainably meet its target, although we do see risk of ANZ prematurely reducing investment spend to meet this target.
We have increased our FY22 operating expense forecast by 5% to $8.77bn. While we expect ‘run the bank’ expenses to be down in FY22F, investment spend is expected to be up. We expect ANZ to reduce investment spend progressively over FY23F such that total costs are down to $2bn in 4Q23F.
Credit quality sound
The FY21 credit impairment benefit of $567m is better than our expectation of $457m. We had flagged potential for further collective provision release and this has turned out to be the case. The collective provision (CP) coverage of credit risk weighted assets (CRWA) has reduced from 1.24% at Jun-21 to 1.22% at Sep-21.
Gross impaired assets declined 21% over 2H22 and this led to a 15% reduction in the individually assessed provision over this period. Individual provision loss rates are now running close to historic lows.
Given that ANZ’s pre-pandemic CP coverage of CRWA was 0.94%, we see potential for further CP release. However, we are assuming the CP coverage will remain unchanged at 1.22% over our forecast period.
Investment view and changes to forecasts
We have reduced our cash EPS forecasts by 8.0%/4.2% for FY22F/FY23F respectively.
Our price target, based on our DDM valuation, is (login to view).
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