ANZ Group: Loan Growth and Sound Credit Quality Drive Higher Profit

We make no change to our AUD 31 fair value estimate for wide-moat ANZ Group ANZ following a brief third-quarter update. Highlights include above-market lending volume growth, a strong capital position, and a moderate rise in loan book stress.

As is usual for ANZ Group, the third-quarter trading update made no mention of net interest margin. With peers noting margin softness from intense home loan competition and customers switching to term deposits, the stronger loan growth for ANZ suggests weaker margins from greater discounting and cash-back offers. Our fiscal 2023 NIM forecast of 1.7% is a 6-basis-point increase on fiscal 2022, less than the 10-basis-point uplift we assume for National Australia Bank.

While stress is growing among borrowers, it remains low compared with history. Australian housing 90-day arrears increased 3 basis points to 60 basis points. Key states New South Wales and Victoria were around 90 basis points in fiscal 2019.

The quarterly debt expense shrank to just AUD 77 million, or 4 basis points of loans, and we lower our fiscal 2023 forecast by AUD 200 million to around 7 basis points of loans. Most of the benefit to profit is offset by a higher operating expense forecast, though. ANZ Group, like peers, is focused on productivity benefits, but recent bank results highlight wage inflation, fraud, and compliance cost pressures.

With ANZ Group holding loan-loss provisions steady, and Commonwealth Bank and National Australia Bank announcing share buybacks, the major banks appear more comfortable around loan-loss risks.

The capital position is sound with a common equity Tier 1 ratio of 12.3%, excluding capital set aside for the Suncorp Bank acquisition. That’s AUD 3.5 billion, or AUD 1.20 per share in surplus capital, which is at the top end of ANZ Group’s target range. Our AUD 1.62 fiscal 2023 dividend forecast assumes a payout ratio of 66%. At the current share price, ANZ Group trades on an attractive fully franked dividend yield above 6.5%.