ANZ Group’s (ASX: ANZ) fiscal 2025 underlying profit of AUD 6.9 billion was flat on last year, but profit dived 14%, including significant items such as penalties and redundancies. Softer net interest margins weighed on 3% loan growth. Final dividend is steady at AUD 0.83 per share, 70% franked.

Why it matters: The result is as expected, and our forecasts are broadly intact. Australian retail margins were slightly disappointing, with lending and deposit competition less of a drag for peers. The bank is now less aggressively pricing to help margins, and as a result, is losing market share.

  • We expect that ANZ continues to lose market share in fiscal 2026 and gets back closer to market growth rates in fiscal 2027, helped by an improved digital offering, faster loan approval times, and an increase in home and business lender numbers.
  • Guidance for fiscal 2026 operating expenses to decline 3% is no surprise, given AUD 800 million in cost savings announced last month. The starting point is an unattractive underlying cost/income ratio of 53%, which is the worst of the major banks, which currently range from 46% to 53%.  

The bottom line: We retain our $33 fair value estimate for wide-moat ANZ, which we modestly lifted last month with the strategic update. Shares are overvalued. ANZ trades on a P/E of 15 and offers a dividend yield of 4.5%, 70% franked.

Big picture: Our fiscal 2028 forecasts are generally in line with ANZ’s mid-40% cost/income target and return on tangible equity of 12%. We forecast the cost/income falls to 47.5% by fiscal 2028, benefiting from the removal of duplicated technology system costs and greater process automation.

Between the lines: The balance sheet is sound, with a common equity Tier 1 ratio of 12.3%, comfortably above the 11.0%-11.5% target range. We think this gives the bank enough headroom to complete its digital investments, increase the loan book, and maintain modest dividend growth.

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 current investments in its retail banking platform. These investments include better digital offerings and more lenders. 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.

ANZ 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.

ANZ 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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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

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.