Australia and New Zealand Banking Group (ASX ANZ) have been operating in a challenging environment. With falling cash rates, lower growth and lower margins, ANZ shares has performed worse than its main competitors. On top of that, the royal commission is circling but we don’t think this will affect the ANZ bottom line as bad as many investors think. In this current operating environment, is the ANZ share price today worth buying?
About ANZ (ASX ANZ)
Australia and New Zealand Banking Group (ASX ANZ) is a financial products and services provider listed on the ASX with a market capitalization of $84 billion. ANZ is a major player in domestic and foreign banking.
The business divisions of ANZ consist of Retail, Corporate & Commercial Banking, Global Wealth, International & Institutional Banking. The company achieved ROE of 11.9% in 2017, but revenue growth over the past five years was negative (-2.4%).
Low Cash Rate Environment A Challenge
ANZ has operated in a challenging economic and financial environment over the last few years. After raising the cash rate in 2010, the Reserve Bank of Australia (RBA) has consistently cut and then held the cash rate at record lows. This decline resulted in a negative impact on the ANZ share price.
However, OECD forecasts the policy rate would be raised by RBA in 2018, and the government is committed to reducing the budget deficit gradually, which would likely boost Australia’s economy and facilitate revenue growth. Banks tend to hold vast amounts of cash due to banking activities so any rise in cash rates will increase revenue.
Due to the high amount of gearing that banks operate at, any increase in cash rates will strongly boost the ANZ share price.
Australian Banking Sector 5% More Productive Than Global Competitors
The banking industry has shown high productivity in the past several years. The productivity of the Australian banking sector is 5% more than the average productivity of global competitors in the industry.
Additionally, the country’s mature financial services industry is the largest contributor to the Australian economy, generating 9.4% of total Gross Value Added.
Low-Profit Margin Limits ANZ’s Asset Business
ANZ has relatively low-profit margins and capital efficiency. Its net profit margin of 24.96% is lower than the average of its peers at 31.3%. Meanwhile, Return on Assets (ROA) of 0.71% is also lower than peer median of 0.79%. In terms of risk, its risk-weighted assets on equity at 7.02 & net loan assets on equity at 9.72 are both higher than peers of 7.00 and 7.11 respectively. This would limit its expansion of loan asset business in the long run.
Unless ANZ can increase itsmargins and return on assets, the ANZ share price will continue to trade at a lower premium to its peers, reflecting its poorer performance.
ANZ’s Business Growth Rate Is Lower Than Peers
Although earnings growth at 12.26% is higher than the average of its peers at 7.67%, the deposits growth at 2.36% & loan assets growth at 1.03% are significantly lower than peer median of 7.38% and 6.43% respectively. The current trend is likely to continue, which could continue to have an impact on its future profitability.
ANZ Pulling Out Of Asia Market
ANZ differentiates itself from its domestic peers with a much larger international operation. ANZ has a strong international presence, with offices spread over 34 countries. However, small-sized retail & wealth businesses in Asia underperformed the average over the past five years.
ANZ is in the process of pulling out of several Asian partnerships and withdrawing retail banks in Asia. Cutting small-sized retail business and focusing on higher profitability areas could result in a simpler and more profitable business structure. However, investors don’t seem to be responding well towards this strategy and have not helped the ANZ share price to recover.
ANZ’s Relatively Poor Financial Performance
ANZ’s revenue has declined approximately 2.4% per annum over the last five years, slightly underperforming the overall industry which retreated 1.8% per year. The profitability of ANZ’s assets is not great, Return on Equity (ROE) has fallen from 15.3% in FY14 to 11.9% in FY17.
Furthermore, ANZ shares recorded a net interest margin of 1.87% in FY2017, which has decreased by approximately 9.2% from FY2014. This has lead to a $223 million decrease in net interest income. This was caused by the introduction of the Australian Major Bank Levy on 19 June 2017 & a low cash rate of 1.5%.
ANZ shares poor financial performance has been reflected in the ANZ share price today, where ANZ trades at a much lower premium than its competitors.
Compared to its peers Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac (ASX: WBC), ANZ has underperformed and so has the ANZ share price. At this point, the banking industry has a number of headwinds, especially for ANZ and we don’t think the ANZ share price today is worth buying at the moment. However, but with the prospect of higher interest rates ahead and divestment of Asian assets, ANZ still has a lot of potential in the future.
More MF & Co. Research
Henry is a co-founder of MF & Co. Asset Management with over 12 years experience as a trader, investor and asset manager. Henry’s focus is on High Net Worth Wealth Management and using algorithmic quantitative trading systems to invest for his clients. Henry also trains new Interns and Advisers on trading and risk management.