ANZ Bank certainly seems to have taken care of its own balance sheet through the pandemic, but it has been slow to re-open its business and has been caught napping. Cash earnings of $6.1 billion in FY21 was a welcome return to normality as is the dividend payout, but ANZ appears to be a sitting duck for nimble and hungry competitors.
After a flurry of activity to chase market share in home lending in 1H21, ANZ embarrassed itself by being under-prepared for the swell in refinancing activity. Throwing plenty of resources (people) at the problem to try and catch up only partially saved its blushes as the bank saw its market share drop to 13.9% from 14.5% last year. CEO Shayne Elliott stuck his hand up to take the blame, but he already has one foot out the door as the succession planning gears up to find his replacement.
To provide some context for this issue, ANZ’s 0.6% market share loss is approximately $12 billion FUM. Macquarie Bank reported 14% growth in its home lending portfolio to $76.4 billion in 1H22 representing market share of 3.8%. So, Macquarie’s portfolio growth was about $9 billion. Home lending is a high value and core market for ANZ so the loss of market share is concerning.
Just as well there is ‘NZ’ in ANZ as the kiwi contingent certainly carried its weight in the group performance in FY21. Cash earnings lifted 48% to A$1.5 billion representing 24% of group earnings. But this is only a return to its FY18 earnings level in NZ, not a miracle boom in profitability. The NZ bank has 30% share of the New Zealand home lending market which has experienced no losses for the last three years.
The full year result was helped by a total provision release of $567 million compared to last year’s impairment charge of -$2.7 billion.
ANZ is carrying more capital than it needs, even after announcing a $1.5 billion share buyback that started in August and is half complete. ANZ’s CET1 ratio of 12.3% is comfortably above where the regulator APRA needs it to be, but other than restoring the dividend payout to 65% (target range 60-65%), it is keeping its powder dry for now. We do expect further capital management initiatives over time.
The bank improved its productivity but this was offset by the investment spend needed to achieve it leaving total expenses flat for the year at $8.6 billion. ANZ’s target FY23f expense count is $8 billion.
Investment view
We commented back in May on ANZ’s ‘commendably dull’ 1H21 result and the company has been remarkably consistent in the back end of the year in this regard. But it clearly has work to do to be more competitive in home lending and to chip away at reducing its cost base. The business is stable but its earnings growth outlook is modest. The restoration of the dividend yield above 5% provides some comfort to shareholders with the prospect of further capital management also encouraging. The earnings risk stems from competition within the sector and ANZ needs to pick up its game in this respect. We have retained our Hold recommendation.
