ANZ Banking Group: Rising rates are a ray of hope

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
08 February 2022, 9:30 AM
Sectors Covered:

  • ANZ Banking Group (ASX:ANZ) has today provided a 1Q22 market update alongside its Pillar 3 release; however, no earnings figures for 1Q22 have been provided.
  • We have reduced our cash EPS forecasts by 3-4% due largely to lower net interest margin forecasts, lower non-interest income forecasts and lower Australian home loan balance forecasts.

Headline NIM disappoints but underlying NIM in line with our expectation

ANZ’s NIM, excluding Markets and notable items, contracted 5bps from 2H21 to 1Q22. The largest driver of this contraction is New Zealand home loan pricing, which we believe is the result of swap rates increasing faster than the interest rate increases on NZ fixed rate mortgages thus far.

The headline Group NIM contracted 8bps from 2H21 to 1Q22 with a drag of 4bps from Markets. ANZ has said that the impact of rising rates, predominantly in NZ, and recent deposit pricing are expected to be supportive of the Group NIM in 2Q22. 

ANZ’s update appears to support the view that the asset mix headwind from an increasing proportion of fixed rate home lending in Australia may now have peaked with ANZ today saying that fixed rate lending, as a proportion of total Australian home loan flow, declined across 1Q22 from ~50% to ~46%. This proportion further declined to ~40% in Jan-22. 

ANZ appears to be experiencing less pressure on its Australian NIM relative to peers, however, this is not surprising given that ANZ is not achieving much growth in its Australian home loan book. 

ANZ’s Australian home loan book was broadly flat from Sep-2021 to Dec-2021 with ANZ today saying that it has “made solid progress in Australia to improve systems and processes for simple home loans with application times now in line with other major lenders”. However, ANZ added that “efforts continue to improve response times for more complex home loan applications”.

Run-the-bank expenses disappoint

The challenge of improving turnaround times for more complex home loan applications in Australia will presumably result in upward pressure on both opex and capex. ANZ has today said that it is investing in its Australian Retail and Commercial business “at a faster rate”. 

ANZ has said that run-the-bank costs are expected to be broadly flat from 2H21 to 1H22. This statement is likely to be a source of disappointment for the market given that ANZ said at the FY21 result release that it is aiming to reduce run-the-bank costs from $7.4bn in FY21 to an annual run-rate of ~$7bn by end-FY23F.

ANZ also said at the time of the FY21 result release that it is aiming to reduce ‘change-the-bank’ costs from $1.3bn in FY21 to an annual run-rate of ~$1.0bn by end-FY23F; however, ANZ did flag the potential for an increase in investment spend in FY22F.

We expect investors to be sceptical about ANZ’s ability to achieve and sustain an $8bn cost base until there is an improvement in the performance of the Australian Retail franchise.

Balance sheet remains strong

Credit quality metrics remain sound in overall terms, and ANZ has today announced a net provision release of $44m for 1Q22.

ANZ’s CET1 ratio was 11.65% as at 31 December 2021, and it has now completed approximately two-thirds of its $1.5bn on-market buyback. ANZ has today said that its capital position continues to provide flexibility to return further surplus capital and ANZ is considering increasing the size of the current on-market buyback.

We are forecasting ANZ to have surplus CET1 capital of ~$5bn at end-FY22F.

Investment view and changes to forecasts

Our cash EPS forecasts are reduced by 3.9%/3.4%/3.2% for FY22F/FY23F/FY24F respectively due largely to lower non-interest income forecasts (due to ANZ offering customers simpler and lower fee options in its Australia Retail & Commercial business from March 2022), lower Australian home loan balance forecasts, and lower NIM forecasts.

Our target price, based on our DDM valuation, is (login to view). Retain Add recommendation.

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