The honeymoon is over for ANZ and investor discontent is intensifying with at last one top analyst downgrading the lender after analysis revealed a yawning earnings gap arising from the bank pulling out of Asia.
"We have reduced confidence in ANZ’s revenue recovery and believe its loan loss gap to ‘normalised’ loss rates is greater than peers,” Morgan Stanley’s Richard Wiles said in a client note.
“At the same time, its cost focus and relative capital strength are well understood, while benefits of the ‘ANZ Solution’ are reflected in the price."
After selling unprofitable Asian assets and putting its wealth arm on the block - which includes life insurance operations and fund management - there is a feeling that revenue attrition arising from the bank's divestments in Asia has been underestimated.
“At the same time, its cost focus and relative capital strength are well understood, while benefits of the ‘ANZ Solution’ are reflected in the price," said Wiles
Lack of confidence
Consequently, Morgan Stanley has downgraded the ANZ and trimmed its share price target to $29 prompting a 1.93 per cent drop to $29.30 at 3pm yesterday.
Explaining his lack of confidence of a 2018 revenue rebound - given margin headwinds, slowing housing loan growth and the elevated first-half markets income - Wiles has cut his revenue forecast by 2 per cent.
“We now expect another flattish year-on-year outcome," he said.
The analyst has also taken a knife to 2018 margin forecasts and sliced off 5 basis points because Institutional banking remains competitive and the expected margin recovery from re-balancing is not eventuating.
Moreover, according to Wiles, ANZ gets less benefit than peers from home loan re-pricing and an in-house survey suggested that it will need to compete more aggressively to prevent market share loss.
From where he sits, the bank’s geographic and deposit mix reduces its leverage to lower funding costs. While Wiles believes the company-specific problems of 2016-17 have passed, his estimate of risk tendency confirms that ANZ still has the highest risk profile of the majors.
Higher risk profile
On top of having a higher risk profile, Wiles thinks ANZ has more exposure to "pockets of weakness" than the other major lenders and the Morgan Stanley survey indicated that its mortgage customers have the highest average debt-to-income ratios.
That said, the banking specialist is convinced the cost out story extends beyond the restructuring of the Institutional bank in 2016-17, and that a $9 billion group cost base is achievable in 2019, assuming underlying expense growth of 3 per cent is offset by cost savings
A further blow for investors who were pinning their hopes on a share buyback is that Morgan Stanley is not expecting a buyback until 2020 without more asset sales.
“ANZ has re-rated since chief executive Shayne Elliott announced decisive steps to create a simpler, better capitalised and more agile bank. The P/E multiple is now near the top end of its post-2009 range and the discount to peers has narrowed to just 3 per cent, which is line with the long-run average," added Wiles.