Report on ANZ Banking Group Ltd.

Introduction

The report is presented as an analysis of Australia and New Zealand Banking Group Ltd. that is listed on the ASX. This report will analyze the share price history, valuation techniques, successful actions taken for shareholders’ wealth maximization, dividend policy and capital structure of ANZ Group Ltd. over the period of last 12 months.

Performance of ANZ Group over Past 12 Months

During the first half year of 2020, ANZ reported the statutory profit after tax of $1.55 bn (that came down by 51%) as compared to $3.17 bn in previous comparable period (1H2019) (Barbaschow, 2020). The cash-profit also declined by 60% followed by a further decline in EPS by 60% and ROE by 732 bps. The new EPS remained to by 49.4 cents as compared to 124.8 cents in 1H2019. The company also chose to defer the dividends (ANZ, 2020a). This whole decline in the operations of the company was primarily due to credit impairment charges of around $1.64 bn that also comprised of increased credit reserves during COVID-19 equivalent to $1.031 bn (ANZ, 2020a).

The company faced a huge challenge of COVID-19 during past 10 months due to which it had to defer loan payments for over 180,000 customers and offering $16 bn additional lending to its long-term investment-grade institutional customer for supporting them throughout the period (Mirage News, 2020). However, due to its strong balance sheet and loyal customer base, the ANZ Banking Group Ltd. has emerged out to be a survivor in these pandemic crises. The group decided on deferring the budget salary increases in 2020/21 while focusing on rewarding the low-tier staff members who have been working hard. Overall, the company’s cash earnings per share also fell down by 60% to 50cents. However, it maintained a strong Tier 1 Capital Ratio of 10.8% uptil March 2020 even after bolstering its credit reserves to record levels. The liquidity of the group remained strong (Butler, 2020).

Share Price History & Volumes over Past 12 Months

Figure 1: Share Price Fluctuations in Past 12 Months

Source: (ASX, 2020)

As seen above, the peak share price was reached on September 27^th, 2019 at AUD 28.680. After that the prices started falling down. The share prices started declining due to COVID-19. On March 23^rd, 2020 the Group’s share prices reached as low as AUD 14.100 (Smith, 2020). This was the peak period of COVID-19 as the economies around the world were collapsing. The gathering of more than 500 people got banned during March as many companies opt to close their offices and enforce the remote working. On 16^th March, 2020, ASX experienced biggest one-day fall in decades where 30% value of the shares got wiped out from the index in less than just a month due to coronavirus-inspired panic selling (Butler, 2020). These issues caused the huge dip in share prices of ANZ Group after 21^st Feb, 2020 till 23^rd March, 2020. After this period, the prices experienced a roller coaster ride and presented a fluctuating rate over past 6 months (Smith, 2020). During March & April, ANZ Group experienced flux of share volumes trading in ASX due to panic caused by COVID-19. Currently, the company’s share price is trading at AUD 16.850 with volume of 7,065,168 as at 21^st September, 2020 (Barbaschow, 2020).

Return for Investment

For the purpose of calculating the return on investment made in the ANZ banking, the capital asset pricing model (CAPM) will be used because this model will best describe the relation between the achieved return and the associated risk in the investment.

For calculating the return on investment in ANZ in short term the Australian risk free rate would be 2%, however the beta for banking group of New Zealand and Australia (ANZ) is primarily 1.3. While by observing the comprehensive market return for the designated period of time it will be 8%.

Formula: Expected return =          ERi = Rf + B(ERm- Rf)

Where

ERi = Expected return on investment

Rf = Risk free rate

B = Beta

ERm= Expected market return

Expected return =	2 + 1.3(8 – 2)
Expected return =	2 + 1.3(6 )
Expected return =	2 +7.8
Expected return (Short term) =	9.8%

 

The return on investment for the period of long term the rate of return would be 4%, however the beta of ANZ is same as in the case of return in short term which is 1.3. There will be growth in the market rate of return compared to which was in the short run, in long run market rate of return would be 10% which is due to the recovery made by economy

Expected return =	4 + 1.3(10 – 4)
Expected return =	4 + 1.3(6)
Expected return =	4 +7.8
Expected return (Long run) =	11.8%

 

For discussion on the cause of volatility based on the corresponding holding period, there is the impact of economic factors which include the moderation in the monetary policies made by the government or regulatory authorities. This will be the reason of fluctuation in interest and the inflation rate in the country which will surely challenge the volatility position of ANZ; however the economic demand will also become flexible. ANZ can face multiple changes in their volatility due to certain changes in mentioned economic factors.

On the other hand increase in the inflation and the interest rate is ultimately termed as the beneficial opportunity for banks as the interest rate rises in the country, the bank will earn more income and commission on the landed money. In the long term the expected return on the invested amount in ANZ banking group will also increase due to higher profit made by the company (bank). The inflation rate is the obvious reason on increased loans and borrowings from bank which will increase the revenue and profit for ANZ.

Valuation of Equity

Valuation tools
Enterprise value	=	13.19 billion
Enterprise value	=	0.81
Revenue
Price	=	0.78
Book
Price	=	11.57
earning
Payout ratio	=	103.40%
EPS	=	1.46

Source: (Yahoo Finance, 2020)

Above mentioned are some of the key indicators used for the valuation of equities for ANZ. Firstly for making the recommendation EV / revenue will be analyzed which is 0.81, as per the rules of valuation the lower the EV/Rev the greater will be the return for investors.  Based on the revenue the analysis of the ANZ will be made by the investors. Over all ration of EV/Rev is showing the better results. The total enterprise value of ANZ is 13.19 billion which is seems to be better and it shows that the higher market capitalization has been achieved by ANZ banking group.

The market value of ANZ is determined using the price/ book ratio; majorly it shows that area covered by the bank in the market and the extent of investors attached to it. Here the P/B ratio is below 1 which shows the undervaluation of ANZ stock. Price / earnings ratio provides the information related to the expectation of the return on the investment made in the company. It also provides the information related to the payment which investor has to make on the basis of earning. The P/E ratio of ANZ is 11.57 which claim that the company is overvalued in the market.

Payout ratio of ANZ is 103.40 which mean that major part of the earning is distributed among the stake holders of the company (ANZ, 2020a). By analyzing the above mentioned valuation tool the recommendation for the investors is to buy and hold the securities of ANZ, the reason is the volatility of the bank and the higher return paid by them to their shareholders and investors. After viewing the performance and the valuation result of the company the analyst also recommended the strong buy for the investors.

Dividend Policy

During March, 2020, the Group announced the slumps in profits caused by $1 bn extra reserves set aside related to COVID-19 loan losses (Yeates, 2020). On top of it, ANZ took $815 mn hit on its Asian investments due to which it decided to defer its dividend payments until the situation becomes better. In previous years, the Bank has been following a progressive dividend policy where the dividends were allowed to grow in line with the earnings. The bank had set a target of paying out 65% to 70% of its earnings uptil 2017 as a part of its progressive dividend policy for keeping its shareholders happy (Yahoo Finance, 2017). However, in the time period of last 12 months, it has become difficult to keep up with this strategy because of crumbling confidence caused by COVID-19 in ASX.

ANZ announced an interim dividend of 25 cents per ordinary share on 30^th September, 2020 (Yeates, 2020). The interim dividends were announced to be fully flanked for the Australian Tax purposes. The decision was made after the long exhausting period of COVID-19 that gave revenue challenges to the bank. During March, 2020, the company was triggered towards generating excess capital whilst facing revenue challenges (ABC News, 2020). The other banks Westpac and Bendigo also didn’t pay the dividends, followed by ANZ’s decision to defer the dividends for few months (ABC News, 2020). During mid-year, the bank decided to prioritize the dividend reinvestment schemes in order to ensure that the dividends paid wouldn’t leave the bank with short of capital. (Neiron, 2020)

According to McInnes (2020), a financial analyst, the bank deferring or reduction in bank dividends until later in the years could be translated into disappointment and frustration amongst shareholders in Australia. However, as per ANZ Groups’ reports, paying dividends using a dividend reinvestment program would help the investors in staying tuned for the full dividends in coming months courtesy to the growth in economy after COVID-19. According to Walton (2020), as the Group released H12020 results and announced a deferring plan of dividends, the stock market responded predictably and investors started bidding the stock down by 2.1% in the first hour of trade.

The headwinds of COVID-19 are still problematic for the bank shares for many of the Australian investors whose portfolios are made up of the big four banks as these four banks (ANZ, NAB, CBA and Westpac) represent 20% of S&P/ASX 200. With the decisions of deferring the dividend payments for long, the risk of investors reeling away is looming over the ANZ Banking Group Ltd (Walton, 2020).