ANZ was downgraded to a “sell” on Monday by UBS, with some of the risk being placed at the doorstep of the new CEO, Nuno Matos, who started in May. However, he and the bank have the advantage of low market expectations, as ANZ has underperformed its peers over the past five years, with a 450bps contraction in its return on equity (ROE). In particular, its retail franchise has been lagging behind its peers, including Macquarie, with cash profits declining by nearly $1 billion in recent years.
- Two main areas of risk for UBS in the short term are increased costs to restructure its retail division prompting a subsequent cut in its dividend, according to UBS.
However, it is the cheapest of the large banks, and the appointment of the new CEO offers a chance for a reset, especially given his proven ability to learn and adapt quickly to new markets. With a strong Institutional and New Zealand focus, ROE upside may come from integrating Suncorp Bank and a retail turnaround, two areas of concern to many investors. ANZ shares have underperformed the banking sector year-to-date by over 8%, with CBA the standout winner. ANZ is already trading at a steep P/E valuation discount of over 30% compared to the sector, which we believe more than compensates investors for the risks ahead. Its relative underperformance reflects its weaker operational metrics compared to peers like NAB and WBC, but its catch-up can be explosive if Mr Matos can show signs that the ship is turning.
MM and ironically, UBS both see significant long-term optionality for ANZ, especially if retail banking turns a corner. Mortgages remain the most crucial vertical within retail banking for Australian banks, with Commonwealth Bank (CBA), National Australia Bank (NAB), and Westpac generating approximately 70% of their earnings from retail and business banking. In comparison, ANZ only earns 40% from these verticals, leaving plenty of room for improvement. For MM, the key, not the issue, is Nuno Matos, ANZ’s new CEO; he’s an experienced executive who has run large banking and wealth management operations, his reputation for being e diligent operator with a focus on cost and streamlining businesses looks a perfect fit for the task ahead at ANZ.
- ANZ has four primary objectives: restore risk management and governance (reputation), turnaround the retail bank, integrate Suncorp Bank, all while maintaining and improving a stable operational bank.
UBS has arrived too late to this particular party in our view, with ANZ already priced for significant underperformance, with its more than 6%, part-franked yield way ahead of its peers. While this would allow for a cut if required to align it with NAB & WBC, we would be very surprised if the smallest member of the Big 4 went down this path. But, if we’re wrong and Nuno Matos does clear the decks, allowing him to over-deliver moving forward, we are likely to increase our exposure into any subsequent weakness if it were to plat out.
- We remain positive on ANZ, targeting new highs through 2025/6: MM is long ANZ in our Active Growth Portfolio and Active Income Portfolio.
MM is long and bullish ANZ
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