ANZ’s (ASX: ANZ) five-year strategic plan is focused on better customer experience, lower operating costs, and improved management of nonfinancial risks. Capital will be bolstered by ceasing a share buyback and offering discounted dividend reinvestment plans. The plan is to keep the final dividend steady.

Why it matters: The ANZ Group 2030 strategy hinges on getting things done cheaper and faster, and once the basics are done well, improved customer experience is expected to lead to better retention and customer wins. More home and business lenders will also be added to support growth.

  • Despite already announcing a large headcount reduction, fiscal 2026 cost savings of $800 million are bigger than we expected. The bank also almost doubled target cost savings from the Suncorp acquisition to $500 million by fiscal 2029.
  • Given a cost/income starting point of 52%, and short-term guidance, material savings appear achievable. Our fiscal 2026 home loan growth forecast is lowered to 1.5% from 3.5%, as the bank ends cashback offers, and investment in people and technology takes time to yield benefits.

The bottom line: We increase our fair value estimate 3% to $33 for wide-moat ANZ, with a similar increase to our medium-term earnings per share forecasts after assuming larger cost savings. Shares are modestly overvalued, but the discount to peers likely reflects execution risk on cost reductions.

Big picture: Our fiscal 2028 forecasts are generally in agreement with ANZ’s mid-40% cost/income target and return on tangible equity of 12%. Excluding one-off costs, we forecast cost/income falls to 47.5% by fiscal 2028, down from 50% previously, and bringing it closer to our 47% Westpac forecast.

  • Fears the dividend would be cut have been put to rest, with the board’s intention to hold the final fiscal 2025 dividend flat at $0.83. ANZ is not in a weak financial position, but management wants a larger buffer to regulatory requirements while implementing its strategic plan.

ANZ Group needs to hold market share and deliver margin and efficiency improvement

ANZ Group is the owner of ANZ Bank, the smallest of Australia’s four major banks by market value and the largest bank in New Zealand and the Pacific, offering a full range of banking and financial services to the consumer, small business, and corporate sectors. Like the other major banks, ANZ Bank has a well-recognized and trusted bank brand, large advertising and marketing budget, and customer fulfilment capacity (branches, systems, funding capacity) to capitalize on this brand equity. We see the firm’s strategy to simplify and focus on its highly profitable core banking operations as logical. The acquisition of Suncorp Bank provides an avenue to leverage benefits of recent investment in its retail banking platform. Integration risk can not be ignored, but overall we believe the acquisition is strategically sound.

Tight underwriting standards, lender’s mortgage insurance, low average loan/valuation ratios, a high incidence of loan prepayment, full recourse lending, a high proportion of variable rate home loans, and the scope for interest-rate cuts by the Reserve Bank of Australia, or RBA, combine to mitigate potential losses from mortgage lending.

The main current influences on earnings growth are modest credit growth, with households and businesses adjusting to lower borrowing capacity after a sharp increase in rates and slowing economic growth. Businesses are expected to be more cautious on making large investments as households rein in discretionary spending. Margins fell as banks competed aggressively in a low credit growth and high refinance market, but margins have stabilized, and we expect competition to be rational in the medium term. Despite productivity benefits, operating expenses are increasing as investments to make the bank more efficient and competitive across its digital offerings—namely home loans and savings.

In Asia, ANZ Bank targets large clients and has walked away from lending to small business. Given ANZ Bank would have no competitive advantage against local (and much larger) lenders, we support the revised strategy.

Bulls say

  • ANZ wins market share in home loans and retail customer deposits after rolling out an improved digital offering.
  • A large institutional client base and geographic footprint leaves ANZ well placed to support customers transitioning to net zero and moving supply chains in response to US tariffs.
  • Nonbank lenders and even nonmajor banks reliant on wholesale funding and equity markets cede market share back to the major banks in a rising rate environment.

Bears say

  • ANZ Bank sinks money into new systems but remains subpeer on returns on equity, cost efficiency, and net interest margins.
  • Sourcing more funding from institutional customer deposits, which are more price-sensitive, ANZ has less margin upside from higher interest cash rates than major bank peers.
  • After acquiring Suncorp Bank, issues with loan processing and integration result in the bank ceding market share and spending more than originally guided on integration.

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Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.