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ANZ $824 million profit hit, other banks to follow

Emma Rapaport  |  08 Oct 2018Text size  Decrease  Increase  |  
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ANZ Bank branch Wellington

Morningstar analysts have downgraded their earnings forecast for Australia & New Zealand Banking Group following news that the lender is facing record compensation costs and have warned that other banks could face similar charges. 

ANZ, which is due to release its full-year earnings at the end of this month, announced $421 million in post-tax remediation costs to cover customers charged fees for no service and inappropriate financial advice. 

ANZ's remediation bill includes $127 million for businesses recently sold to IOOF, while other items include $159 million in restructuring costs and $38 million in royal commission legal costs. The profit hit will total $824 million.

Morningstar senior equity analyst David Ellis says the update confirms the current "sorry state-of-affairs" facing the major banks, particularly around customer trust.  

"The Royal Commission has forced the banks and other financial service firms to publicly admit to a litany of very poor customer outcomes, with the focus on the banking oligopoly’s disappointing track record for proactive identification and correction of errors and omissions during and up to the past decade," Ellis says. 

"Under the scrutiny of the Royal Commission, the major bank behaviour towards customer remediation has been found wanting, leading to a series of expensive customer compensation announcements."

Cash earnings forecast downgrade

Morningstar analysts have reduced wide-moat-rated ANZ's forecast cash earnings for continuing operations by $584 million to $6.3 billion for fiscal 2018. 

The costs are weighted toward the second half, with $711 million to be recorded in the six months to September 30. 

ANZ is the second large Australian bank to warn of mounting remediation charges. Rival Westpac last month alerted the market that full-year cash earnings would take a $235 million hit due to a provision for customer compensation and litigation. 

Ellis says that he would not be surprised to see National Australia Bank announce similar charges before the bank reports fiscal 2018 results on 1 November 2018. 

In the days following the release of Kenneth Hayne's scathing 1000-page royal commission interim report, Ellis predicted a continuation of heightened levels of uncertainty for bank stocks, adding that he can see no major positive catalyst for the earnings in the next six to 12 months. 

At current prices, Westpac (ASX: WBC), Commonwealth Bank (ASX: CBA), and National Australia Bank (ASX: NAB) are most undervalued, trading 27 per cent, 18 per cent and 17 per cent, respectively below Morningstar valuations. ANZ Bank (ASX: ANZ) is today trading below valuation having fallen 2.5 per cent since open this morning. 

The chief executives of the big four major banks are due to be questioned by the House of Representatives committee on economics on Thursday and Friday, with a third hearing day to be held next week.  

Committee chair and Liberal MP Tim Wilson says the hearings will be an important opportunity to consider how to ensure appalling behaviour is not repeated among the banks, without taking away from their essential role in the economy. 

Ellis notes that the ANZ's strong capital position is "little affected" by the charges and costs, and that the final dividend for fiscal 2018 is unlikely to be impacted.

 

 

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Emma Rapaport is a reporter with Morningstar Australia, based in Sydney.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is an editor for Morningstar.com.au

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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