Can ANZ’s “strategic win” sustain margin pressure?
The bank has lifted home loan growth above its peers but has this come at a cost to its margins and dividend growth.
Mentioned: ANZ Group Holdings Ltd (ANZ)
ANZ Banking Group (ASX: ANZ) managed to claw back market share on the home loan segment. It was indeed a highlight in its fiscal 2023 results.
ANZ Bank grew home loans by 8 percent compared with market growth of 4.9 percent, lifting market share to 13.4 percent from 13.0 percent.
Commenting on the growth, ANZ chief Shayne Elliott highlighted the bank’s focus on improving the customer experience.
“In Australia Retail, our ongoing investment in home loan processing supported consistent turnaround times which, coupled with ongoing digitisation for deposit account opening, resulted in high-quality growth in our retail balance sheet,” Elliott said.
The result contrasts with the Commonwealth Bank’s first quarter result which saw home loan and deposit growth below the rate of growth for the sector.
Morningstar bank analyst Nathan Zaia, notes this is a “strategic win” for ANZ but added that “subsequent aggressive mortgage pricing will get harder to justify. Zaia expects this pricing will ease over the next 12 months.
Indeed, the bank had previously lost material home loan market share and had less funding sources from low-cost customer deposits. This had placed margin pressure on the bank.
However, in its results, it reported a lift in both retail and commercial deposits. The bank’s decision to aggressively price its home loans meant that ANZ still underperformed its peers.
Zaia expects margin pressure to continue in the short term, but over the medium term, more rational pricing is likely to prevail to improve ROE across the sector.
“What would change this is if the industry could extract cost savings or report lower credit losses than historical levels to offset lower revenue growth, which makes lower margins acceptable.”
Zaia has lowered Morningstar’s short-term forecasts based on lower net interest margins and higher operating expense forecasts.
“But we expect competitive pressures to ease as refinancing activity slows, new lending picks up, and the term funding facility is repaid.”
Dividends “surprised”, according to Zaia with lower franking offset by an additional payment.
The final dividend of $0.94 per share was made up of $0.81 franked at 65% and an additional unfranked dividend of $0.13.
Zaia has lowered the bank’s dividend franking forecast and given Morningstar’s outlook for “softer earnings”; he assumes a slightly higher payout ratio in the short-term backed by ANZ’s strong capital position.
Overall, Zai sees the bank as delivering a solid result.
The bank reported a 14 percent increase in fiscal 2023 cash profit to a record $7.4 billion which was largely expected. The result was underpinned by NIM up by 7 basis points and the lift in loan growth. Bad debt expenses also remained low at 4 basis points of average loans.
Earnings, however, weakened over the year, with second-half profit down 6 per cent on the first half.
Costs will also remain a bugbear for the bank.
In line with management guidance, underlying operating costs increased 5 per cent and Zaia expects this to increase in fiscal 2024 with inflationary pressures expected to exceed productivity benefits
The bank’s strong common equity Tier 1 ratio of 12.1 percent, excluding funds raised to acquire Suncorp, remains well above management's target of 11 percent to 11.5 percent.
Next year, a decision on ANZ’s move to buy Suncorp will be finalised with Zaia noting that if the acquisition was to go ahead, the “integration risk” could entail a “bigger risk for the bank.