ANZ: Q1 Update

There are a few reasons house prices have been declining. One is that they'd simply got ahead of themselves; another is that banks have been lending less. It's easy to see how this might have an impact: reduce a borrower's capacity to borrow and you'll reduce their capacity to pay.

But how much is that affecting the market? Not that much, according to ANZ Bank in its latest quarterly update.

Since 2015, the maximum borrowing capacity has declined about 20% based on ANZ's evolving lending criteria. Nearly half of that change is due to more conservative estimates for a borrower's regular expenses. Yet the portion of customers borrowing to capacity has increased by only 2%, to 11%.

ANZ is trying to make a point that it's a conservative lender and that most borrowers have not taken on unsustainable debt. Further evidence of this is in continued low impairment charges. ANZ's annualised impairment charge for the quarter was only 0.1%, which is almost half the level it was two years ago.

The good times won't last for ever, though, and there's an ominous sign in the number of overdue home loans, which rose 2% in the quarter to 0.62% of the total outstanding. Two years ago, overdue home loans only amounted to 0.56% of the total.

Such conditions warrant caution and chief executive Shayne Elliott admits ANZ may have taken it too far in some areas. Winding that back may explain why ANZ has lagged the market for home loan growth, with its outstanding loans declining by 0.2% in the quarter, while the market grew 0.9%.

ANZ has plenty of capacity to boost lending - its CET1 ratio of 11.25% is well above the required 10.5% by the start of 2020. It could also return some of that additional capital to shareholders.

The bank didn't provide details on earnings, although it's likely to be pretty flat, based on the flat lending, low loan losses and comparative peer results this quarter.

ANZ is continuing its shift away from low-returning institutional banking towards retail and small business customers. This should improve returns, though it lags both Westpac and Commonwealth Bank who are more dominant in these areas.

For that reason, we have a Buy price below that of peers at around 1.1 times book value. With ANZ trading at around 1.3 times, we're some way off an upgrade. HOLD.