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ANZ profit worse than underlying performance

Nathan Zaia  |  30 Oct 2020Text size  Decrease  Increase  |  
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We retain our $25 per share fair value estimate for Australia and New Zealand Banking Group (ASX: ANZ) after an expectedly weak fiscal 2020 result.

Cash profit dived 42 per cent to $3.8 billion, with the confronting fall in profit largely due to loan impairment expenses of $2.7 billion compared with just  $800 million last year, and notable items wiping $1.5 billion off cash NPAT. Net interest margins, or NIMs, fell 12 basis points to 1.63 per cent, leading to a 2 per cent fall in net interest income.

Operating expenses were kept flat at $8.6 billion, with increases to risk and compliance spend and digital and data investment offset by efficiency gains. Aspirations to hit an  $8 billion cost base remain, but updates on a new timeline will be provided in six months.

Our current forecasts imply a cost base of about $8.4 billion in fiscal 2023, with the competitive landscape pushing the banks to reinvest savings on digital experience and distribution.

In line with our expectations ANZ Bank declared a final dividend of 35 cents per share, paying out 50 per cent of second-half earnings and taking full-year dividends to 60 cents per share. We expect a 50 per cent payout in fiscal 2021 with the payout ratio lifted to around 65 per cent in fiscal 2022.

With common equity Tier 1 ratio of 11.3 per cent, up from 10.8 per cent in March, we believe the capital position is strong enough to weather the rise in loan losses to come and still pay out dividends.

Our fiscal 2021 cash profit forecast is increased to $4.6 billion, which assumes NIMs weaken further to 1.55 per cent, but loan impairment expenses fall to $2.2 billion. This is still 0.35 per cent of loans, down from 0.44 per cent in fiscal 2020.

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Our expectation is the bank will add to provisions as losses are incurred over the next 12 to 24 months, given uncertainty will likely remain high.

Our longer-term forecasts are unchanged, which assume low-single-digit credit growth, an improvement in margins to 1.65 per cent from fiscal 2024, and loan losses normalising at 0.22 per cent of loans.

Morningstar Premium subscribers can read Nathan Zaia’s here: ANZ profit fall looks much worse than underlying performance and should be the low-point

is a Morningstar equity analyst, covering the banking and insurance sectors.

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