Stock of the Week Australia and New Zealand Banking Group (ANZ)


Australia and New Zealand Banking Group (ANZ) is the nation’s third-largest bank by market capitalisation, and is among the top 50 banks in the world and is one of the shares to buy in a bull market.

ANZ operates retail and business banking in Australia, New Zealand and throughout the South Pacific.

Australia’s banks held up relatively well during the global economic downturn, with provisions for problem loans being the primary issue. However, our major banks believe that provisions have passed their peak and recent results are evidence of this.

ANZ’s 3Q10 results, released today, are a sign of recovery for our major banks. Troublesome bad debt charges decreased whilst underlying profit surged (up 37% for the quarter).

Also in the news is ANZ’s latest foray into Asia. ANZ is eyeing off a 57.27% stake in Korea Exchange Bank, worth $3.8 billion and giving ANZ the opportunity for a solid platform in South Korea.

Tentative Recovery Mode

Like all of our banks, financial institutions, and companies in general, ANZ was hit hard by the global credit crunch, with most of our banks reporting large writedowns and bad debts.

ANZ addressed the global economic downturn in its 1H10 results release, noting that the scale and depth of the crisis in the US and Europe meant that recovery will not happen smoothly.

The US economy is starting to show signs of a sustainable recovery, whilst Europe is still suffering at the hands of the Greek debt crisis, which will impact on credit spreads globally.

Still, ANZ believes the problems in Greece are unlikely to affect underlying economic growth globally and are not going to be very significant for Australia.

The bank has forecast the Australian economy will grow by 3% in 2010, with Asia, excluding Japan, forecast to grow by 8%.

Fitch Recognises Asian Strength

Earlier this week, market chat surrounding ANZ focused on the group’s proposed majority stake ownership in Korea Exchange Bank.

ANZ is participating in a due diligence process for a 57.27% stake in the South Korean bank, worth $3.8 billion on current market values.

Allegedly, private equity fund MBK Partners is still trying to put together a bid for the 51% stake in KEB that Lone Star Funds is trying to offload. MBK is also apparently in discussions with other investors to form a consortium.

A majority stake in KEB would give ANZ a solid platform in South Korea, Asia’s fourth-largest economy and an increasingly important trade partner for Australia.

ANZ will only go ahead with a deal if it satisfies its strict criteria, including that the deal is accretive to shareholder value within the short to medium term.

The latest deal is part of ANZ’s strategy of becoming a super regional lender.

Fitch Ratings agency has recently revised up ANZ’s long-term Issuer Default Rating (IDR) to AA- Outlook Positive from AA- Outlook Stable,  noting ANZ’s Asian expansion strategy and generally improved financial profile.

Fitch said the change takes into account ANZ’s improved earnings diversity following the full acquisition of its wealth management operations.

Quarterly Analysis

ANZ today confirmed that its 3Q10 underlying profit surged 37% to $1.3 billion on year, taking underlying profit for the nine months to 30 June to $3.6 billion, up 26% on year.

Impressively, bad debt charges for the period were at $1.44 billion, a 34% decrease.

The quarterly figures impressed the market today, even offsetting somewhat gloomy outlook guidance.

ANZ said that a global economic recovery was in swing, with the improving economic cycle continuing to see ANZ’s provisions trend lower.

However ANZ cautioned that the global outlook is unusually uncertain on a combination of consumer, business and public sector de-leveraging, domestic and international reregulation, and the implications of high unemployment and other protracted structural challenges in the US and in Europe.

ANZ warned that banks around the world are facing permanently higher costs, with continuing pressures on wholesale funding and deposit rates.

The bank hasn’t yet determined its 2011 funding task but this is expected to come in at around $20-$25 billion.

At the end of June, ANZ had a Tier 1 capital ratio of 10.3%.

Outlook

Australia’s banks held up relatively well during the global economic downturn, with provisions for problem loans being the primary issue. However, our major banks believe that provisions have passed their peak and we agree.

ANZ’s 3Q10 results, released today, are a sign of recovery for our major banks. Troublesome bad debt charges decreased whilst underlying profit surged (up 37% for the quarter).

Also of interest is ANZ’s latest foray into Asia. ANZ is eyeing off a 57.27% stake in Korea Exchange Bank, worth $3.8 billion and giving ANZ the opportunity for a solid platform in South Korea.

Though the market was initially concerned about ANZ’s aggressive Asian growth strategy, ANZ is continuing to benefit from strong growth in Asia as the bank battles softened domestic credit growth.

And while global market volatility continues to mar the future, the improving economic cycle is helping ANZ’s provisions trend lower.

ANZ closed up 1.3% to $22.47 yesterday.

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