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Summary

  • ANZBY is demonstrating gains from its Super Regional Strategy in Asia.
  • It is the only Australian bank pursuing an established offshore revenue strategy in Asia.
  • Latest results delivered increased EPS by 10% and the interim dividend increased 14%.

Performance Overview

Australian & New Zealand Banking Group (OTCPK:ANZBY) recently announced its second quarter (1H14) performance results, delivering an increase to cash profit of 11% to $3.5 billion, increased EPS by 10% to 128.7 cents, and an increase to the interim dividend by 14% to $0.83 cents per share. This was a sound result for CEO Mike Smith and CFO Shayne Elliott, demonstrating that its Asia Super Regional Strategy is delivering on its stated aims of diversifying revenue streams away from traditional domestic avenues, which longer term will differentiate it away from the other three banks of the Australian "Big Four." The company is currently trading at $33.76 AUD with a dividend yield of 4.86%, has a P/E of 12.91, and delivers a return on equity of 15.48.

Discussion

I last wrote on ANZ Bank in November 2013 and in the article discussed the potential consensus opinion from analysts that the Australian banks:

"... were overvalued, and likely to be subject to a huge correction, driven largely by an overheated property market that would soon be subject to a correction similar to the American property market collapse due to the global financial crisis. There have been many to publicly stand by this stance over the last 12 months, including actively shorting Australian banks - considered to be a 'widow maker' trade by many brokers in Australia."

While an initial pullback on Australian banks occurred in early 2014, this was not driven by declining prices in the Australian property market, nor increases in provisions for bad housing loans. On the contrary, it appears more likely to be driven by concerns over slowing demand for commodities from China, tentative business confidence pending release of the Coalition government's first budget, a declining Australian dollar (AUD) and repeated market commentary (hype) on residential housing.

The Australian housing market has continued to grow, with lead growth and recovery driven by Sydney, Melbourne and Brisbane. National house prices increased by 2% over Q1, and growth rates overall were down from the 3.8% recorded in the previous quarter (source: Australian Property Monitors). The continued resilience of the banks' upward growth has been a difficult factor for those shorting the banks to mitigate, not that there has not been short-term price pull backs.

As is usually the historical precedent, growth in the Australian property market commences with the Australian East Coast capital cities, and then filters out to the other capitals and outlying regional areas. Strong auction clearance rates of 75% and higher in capital cities deliver strong lending generation for the banks, with Westpac Banking Corporation (NYSE:WBK) having the biggest lending exposure for New South Wales and therefore benefiting from any growth driven by the Sydney property market.

Whether or not the Australian property market wanes or plateaus, the Super Regional Strategy being pursued by ANZ Bank is designed to help insulate revenue and profit from the traditional mainstay of the Big Four banks, being the residential mortgage market. Being six years into this strategy and with it starting to come to fruition, ANZ Bank is also seeking to increase its wealth management footprint to boost its exposure to superannuation and investments, with the ~$1.5 trillion Australian superannuation market expected to increase to ~$6.0 trillion by 2037 (source: The Treasury).

A further avenue for ANZ to target in this regard, and leveraging off its footprint in Asia, is provision of wealth management advice to applicants successful in applying for a significant investment visa, which requires investment of at least $5.0 million AUD. If successful in this regard, it has the potential to tap into the emerging wealth of Asian investors seeking investments and or residency in Australia.

Summary

ANZ Bank is the only bank that is well progressed in pursuing a diversified revenue strategy that is not domestically anchored. Continuing to develop its footprint in Asia with calculated steady acquisitions and organic growth, and being postured to support successful applicants within the significant investor scheme, will see it continue to be a bank of choice in the constrained and concentrated sector that is Australia. Under the leadership of Mike Smith, with his substantial experience and understanding of the Asian region, ANZ Bank offers potential upside for those with a long-term view for growth.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: From Strength To Strength In Asia: Australia & New Zealand Banking Group

Additional disclosure: The author is long ANZ Bank trading as ANZ on the Australian Stock Exchange. The author is an Authorized Representative of Securitor, which has a business relationship with Westpac Bank. This information is general advice only and represents the authors personal opinion only; it does not represent formal advice on behalf of Securitor. You should seek independent financial advice from a licensed financial adviser before making any investments of your own.