Robust capital base drives group’s profits

What’s new ANZ Banking Group’s profit continues to be on the up and up, with the major bank recently posting a solid 11 per cent increase in cash earnings for the 2013 fiscal year to $6.5 billion. This was the company’s fourth straight year of record profits. In addition, the final dividend of 91¢ a share took the dividend for the full year to 164¢ a share, up 13 per cent from the previous year. The underlying drivers of the bumper result included a rise in net interest income, tight cost control and strong asset quality. Importantly, ANZ Banking Group’s capital position continues to be robust, finishing the year with a Common Equity Tier 1 ratio of 8.5 per cent under the Basel 3 standards, well above the 8 per cent level thought to be prudent.

Outlook With strength evident across most of its core operating and credit metrics, the immediate outlook for ANZ Banking Group remains solid. Furthermore, given the healthy capital position, dividends are likely to be maintained at least at the current level for the medium term. Indeed, the momentum is such that management has projected a further reduction in cost-to-income ratio to at least 43 per cent and achieving a return on equity of 16 per cent or better by the end of the 2016 financial year.

All this will be aided by the benefits which are starting to flow from the bank’s Asian expansion strategy. Already one-third of the institutional clients are using ANZ Banking Group in more than one country, while almost 90 per cent of the top 100 customers are partnering with the bank in more than five countries. This is clearly being reflected in the numbers, as Asian earnings have grown from 24 to 34 per cent of the international and institutional banking income base in the past three years.

Price Shares in ANZ Banking Group have been rising strongly, up an impressive 34 per cent over the past 12 months. In a market where investors are still hesitant on the mining-related sectors, the bank’s resilient earnings growth profile and attractive dividend yield have garnered significant investor support, pushing the stock’s multiples to lofty levels.

Worth buying? ANZ Banking Group has indeed been a Hot Stock for the past year, rewarding its shareholders with solid dividend increases while delivering outsized returns on the capital side. However, with the stock price at such an elevated level, we believe the time has come to lock in some of the massive gains. Consequently, we believe existing holders should consider taking some profits on the stock.

Greg Smith is managing director at Fat Prophets sharemarket research. To receive a recent Fat Prophets Report, call 1300 881 177 or email info@fatprophets.com.au.