ANZ Banking Group (ANZ)

Transcription

1 1 May 2018 Analyst TS Lim Authorisation Chris Savage Recommendation Buy (unchanged) Price $27.47 Target (12 months) $30.20 (unchanged) GICS Sector Banks Expected Return Capital growth 9.9% Dividend yield 5.9% Total expected return 15.8% Company Data & Ratios Enterprise value Market cap n/m $79,629m Issued capital 2,899m Free float 100% Avg. daily val. (52wk) $198.1m 12 month price range $ $32.95 Price Performance (1m) (3m) (12m) Price (A$) Absolute (%) Rel market (%) ANZ Banking Group (ANZ) Unveiling some universal truths in anxious times ~$3.5bn cash NPAT (continuing), 80cps interim dividend ANZ s 1H18 result components are: (1) reported NPAT $3,323m (BP $2,818m); (2) cash NPAT $2,876m (BP $2,733m); (3) cash EPS 98cps (BP 93cps); (4) cash NPAT (continuing) $3,493m (BP $3,295m); (5) cash EPS (continuing) 119cps (BP 112cps); (6) fully franked interim dividend 80cps (BP 81cps), cash payout ratio 80% (BP 87%), continuing payout ratio 66% (BP 73%) DRP to be neutralised; (7) cash ROE 9.8% (BP 9.3%), continuing 11.9% (BP 11.2%); (8) Group NIM 1.93% (BP 1.99%); (9) credit impairment charge $408m/15bp GLA (BP $497m/17bp); (10) cost to income ratio (continuing) 45% (BP 46%); and (11) CET1 capital ratio 11.0% (BP 10.8%). On an underlying basis, most metrics were better than expected with the exception of Group NIM and a flat interim dividend. The NIM outcome took us by surprise, -7bp pcp and -5bp hoh to 1.93% mainly due to unfavourable Markets activities including liquidity drag. Excluding the Markets impact and the removal of Asia Retail & Wealth NIE, NIM would have been only 1bp lower to 1.99% and 1.97% respectively. The fact that underlying NIM was relatively stable appears to be a share price support factor today. While the market may have expected a higher interim dividend, we believe this does not appear to be a major concern given ANZ s very strong CET1 ratio of 11.0% (~11.8% pro-forma, and with 146bp additional upside from further asset sales, e.g. AMMB Holdings and PT Bank Pan Indonesia). Be that as it may, the current CET1 ratio already exceeds APRA s 10.5% minimum requirement by 2020 and this suggests further capital initiatives to come (share buyback still favoured as we understand). $30.20 price target and Buy rating maintained We have only adjusted 2018 cash NPAT on a continuing basis by +4% to reflect the differences in other income and credit impairment charge as per our variance analysis. With subsequent years estimates remaining unchanged, we have maintained ANZ s $30.20 price target. Based on a forward 12-month TSR of >15% and ANZ s enhanced capital management flexibility, the Buy rating is also maintained. Absolute Price $34 $32 $30 $28 $26 $24 $22 $20 May Sep ANZ Jan 17 May Sep Jan S&P 300 Rebased Earnings Forecast Year end 30 September (continuing operations) e 2019e 2020e NPAT (reported) (A$m) 6,406 6,537 6,836 7,127 NPAT (cash) (A$m) 6,809 6,861 6,896 7,187 EPS (cash) (A ) EPS (cash) growth (%) 15% 1% 1% 4% PER (x) P/Book (x) P/NTA (x) Dividend (A ) Yield (%) 5.8% 5.9% 6.0% 6.2% ROE (%) 11.7% 11.6% 10.9% 10.8% NIM (%) 1.99% 1.91% 1.87% 1.87% Franking (%) 100.0% 100.0% 100.0% 100.0% SOURCE: IRESS SOURCE: BELL POTTER SECURITIES ESTIMATES BELL POTTER SECURITIES LIMITED ABN AFSL DISCLAIMER: THIS REPORT MUST BE READ WITH THE DISCLAIMER ON PAGE 12 THAT FORMS PART OF IT. Page 1

2 Unveiling some universal truths in anxious times ~$3.5bn cash NPAT (continuing), 80cps interim dividend ANZ s 1H18 result components are: 1. Reported NPAT $3,323m (BP $2,818m); 2. Cash NPAT $2,876m (BP $2,733m); 3. Cash EPS 98cps (BP 93cps); 4. Cash NPAT (continuing) $3,493m (BP $3,295m); 5. Cash EPS (continuing) 119cps (BP 112cps); 6. Fully franked interim dividend 80cps (BP 81cps), cash payout ratio 80% (BP 87%), continuing payout ratio 66% (BP 73%); 7. Cash ROE 9.8% (BP 9.3%), continuing 11.9% (BP 11.2%); 8. Group NIM 1.93% (BP 1.99%); 9. Credit impairment charge $408m/15bp GLA (BP $497m/17bp); 10. Cost to income ratio (continuing) 45% (BP 46%); and 11. CET1 capital ratio 11.0% (BP 10.8%). As foreshadowed in our preview note, there was a lot of noise in today s result and ANZ continues to report three versions of NPAT: (a) statutory (i.e. reported) NPAT including discontinued operations; (b) cash NPAT including discontinued operations (statutory NPAT adjusted for economic and revenue hedges, treasury shares, etc.); and (c) cash NPAT from continuing operations (including gain or loss on sale from divestments and divested business results Asia Retail, Shanghai Rural Commercial Bank and Metrobank Card Corporation). Heading into 2H18 and based on residual noise from announced asset sales, the third version of NPAT will remain relevant in assessing the bank s underlying (i.e. continuing operations) performance. Figure 1 Noisy 1H18 but as expected Page 2

3 On an underlying basis, most metrics were then better than expected with the exception of Group NIM and a flat interim dividend. The NIM outcome took us by surprise, -7bp pcp and -5bp hoh to 1.93% mainly due to unfavourable Markets Balance Sheet activities including ongoing liquidity drag from having excess liquidity on the balance sheet. Excluding the Markets impact and the removal of Asia Retail & Wealth NIE, NIM would have been only 1bp lower to 1.99% and 1.97% respectively. The fact that underlying NIM was relatively stable appears to be a key support factor for today s share price. While the market may have expected a higher interim dividend, we believe this does not appear to be a major concern given ANZ s very strong CET1 ratio of 11.0% (~11.8% proforma including ~85bp capital benefit from announced divestments net of ~40bp impact of $1.5bn share buyback program, 16.3% international and comfortably ahead of the 14.7% global top quartile benchmark). This would materially exceed APRA s 10.5% minimum requirement by 2020 that would also suggest further capital initiatives to come (share buyback still favoured as we understand). Leverage ratio was 5.4% (6.1% international), roughly unchanged since 1Q18. Organic capital generation was also strong at +72bp (vs. +118bp in 2017) and allocation has become more efficient with more than half of regulatory capital now allocated to the higher ROE retail and commercial businesses upside risk to long term ROE. Figure 2 Top quartile in global CET1 Figure 3 Capital efficiency on the rise, helps long term ROE Page 3

4 The 80cps interim dividend is fully franked (franking credits tight but manageable according to management) and represents a 66% payout ratio on a cash continuing basis (in line with the 60-65% target). The DRP will be neutralised by acquiring shares on the market and further capital initiatives will be considered after taking into account business conditions, regulatory approvals and requirements to support business growth. All else being equal, we reiterate that ANZ s CET1 ratio would further benefit from the inevitable sale of investments in AMMB Holdings (24% stake, $1,185m carrying value or ~30bp benefit) and PT Bank Pan Indonesia (39% stake, $1,033m carrying value or ~26bp benefit) that would increase the ~11.8% pro-forma CET1 ratio by ~146bp and further strengthen the bank s capital management flexibility. Finally, ANZ s existing capital deduction should also sufficiently cover the impact of IFRS 9 (the requirement to recognise expected credit impairment charges earlier) and all funding metrics remain in good shape (NSFR 114.9% vs % at the end of 2017, LCR stable at 134% that is a good thing as too much liquidity drags on NIE/NIM). Top line growth on a continuing basis was flat no surprises here but ANZ s redeeming feature was, in our view, its solid underlying performance (that was helped by strong cost management that resulted in neutral pcp Jaws +2% hoh Jaws ) and steady improvements in CET1 capital and underlying ROA and ROE. Table 1 Strong underlying KPIs likely supported today s share price performance In terms of credit quality, the market traditionally takes a dim view of any lower credit impairment charge to boost the bottom line. In ANZ s case, there appears to be an exception today given the lower charge was consistent with decreases in new and existing provisions across ALL divisions: Australia division benefited from lower provisions and higher write-backs; Institutional division benefited from lower provisions from ongoing portfolio rebalancing; New Zealand division benefited from lower provisions and a one-off large provision taken in the previous year; and Asia Retail & Pacific benefited from the sale of Asia Retail and Wealth businesses. Page 4

5 The positive experience also gels with lower GIA (across all divisions and exposure size; $2,034m vs. $2,384m in 2H17 and $2,940m in 1H17), lower new impaired assets [across all divisions ($963m vs. $1,425m in 2H17 and $1,787m in 1H17) and particularly in impaired loans ($917m vs. $1,315m in 2H17 and $1,637m in 1H17) and non-performing commitments and contingencies ($25m vs. $89m in 2H17 and $62m in 1H17) and with restructured items stable at $21m]. Figure 4 Credit quality still improving 1 Figure 5 Credit quality still improving 2 Variance analysis is disclosed in Table 2 on the next page. Page 5

6 Table 2 Numbers broadly in line with our expectations ANZ Banking Group Y/e September 30 ($m) 1H18 BP Variance Comments Net interest income 7,350 7,399-1% Broadly in line with our expectations Other operating income 2,458 2,185 12% Variance due to timing differences in Wealth income Operating income 9,808 9,584 2% Variance largely due to timing differences in Wealth income Operating expenses -4,411-4,394 0% Broadly in line with our expectations Credit impairment charge % Lower charge across all divisions reflecting lower new and existing provisions Profit before income tax 4,989 4,694 6% Variance largely due to timing differences in Wealth income and lower credit charge Income tax expense -1,489-1,391-7% Function of profit before income tax Non-controlling interests -7-7 n/m Broadly in line with our expectations NPAT (cash basis, continuing) 3,493 3,295 6% Variance largely due to timing differences in Wealth income and lower credit charge Discontinued operations n/m Variance largely reflects lower operating income from discontinued operations NPAT (cash basis) 2,876 2,733 5% Variance largely due to timing differences in Wealth income and lower credit charge DPS (cps) % Unchanged pcp EPS (cash basis, continuing) (cps) % Variance largely due to timing differences in Wealth income and lower credit charge NIM 1.93% 1.99% -0.06% Largely impacted by lower Markets earnings and liquidity drag ROE (cash basis, continuing) 11.9% 9.3% 2.7% Variance largely due to timing differences in Wealth income and lower credit charge Outlook Management has decided to play the conservative card in terms of the outlook over the next 6-12 months, citing revenue constraints (general slowdown in housing approvals including the need for tighter procedures arising from the Royal Commission that would also slow down the approval process), greater competition from smaller banks and nonbanks, consumer cautiousness and residual NIM headwinds (perhaps by a few bp). However, credit conditions should remain benign (providing the unemployment rate continues to be manageable) and ANZ in our view will still retain the capacity to push the cost lever and focus on profitable growth. Figure 6 Outlook conservative Page 6

7 $30.20 price target and Buy rating maintained We have only adjusted 2018 cash NPAT on a continuing basis by +4% to reflect the differences in other income and credit impairment charge as per our variance analysis in the above table. With subsequent years estimates remaining unchanged (Table 3, next page), we have maintained ANZ s $30.20 price target (Table 4, next page). Based on a forward 12-month TSR of >15% and ANZ s enhanced capital management flexibility, the Buy rating is also maintained. Table 3 Estimate changes ANZ Bank 2018e 2019e 2020e 2021e Y/e September 30 ($m) Current Previous Change Current Previous Change Current Previous Change Current Previous Change Profit & Loss Net interest income 14,656 14,925-2% 14,935 15,489-4% 15,618 16,158-3% 16,355 16,895-3% Other operating income 4,782 4,419 8% 4,730 4,465 6% 4,931 4,564 8% 5,056 4,678 8% Operating income 19,439 19,343 0% 19,665 19,954-1% 20,549 20,722-1% 21,412 21,573-1% Operating expenses -8,804-8,883 1% -8,821-9,031 2% -9,102-9,203 1% -9,440-9,610 2% Credit impairment charge ,070 27% -1,025-1,169 14% -1,211-1,280 6% -1,351-1,369 1% Profit before income tax 9,793 9,390 4% 9,819 9,755 1% 10,236 10,239 0% 10,620 10,594 0% Income tax expense -2,918-2,783-5% -2,909-2,843-2% -3,035-2,983-2% -3,149-3,086-2% Non-controlling interests n/m n/m n/m n/m NPAT (cash basis) 6,120 6,100 0% 6,896 6,898 0% 7,187 7,241-1% 7,457 7,494 0% NPAT (cash basis, continuing) 6,861 6,592 4% 6,896 6,898 0% 7,187 7,241-1% 7,457 7,494 0% DPS (cps) % % % % EPS (cash basis, continuing) (cps) % % % % ROE (cash basis, continuing) 11.6% 10.3% 1.3% 10.9% 11.1% -0.1% 10.8% 11.1% -0.2% 10.8% 11.0% -0.2% NIM 1.91% 1.99% -0.08% 1.87% 1.98% -0.11% 1.87% 1.97% -0.10% 1.87% 1.96% -0.09% Cost ratio (continuing) 45% 46% 1% 45% 45% 0% 44% 44% 0% 44% 45% 0% Impairment expense as % of GLA 0.14% 0.18% 0.04% 0.16% 0.18% 0.02% 0.18% 0.19% 0.01% 0.20% 0.20% 0.00% Effective tax rate 30% 30% 0% 30% 29% 0% 30% 29% -1% 30% 29% -1% Table 4 Composite valuation Composite Valuation Value ($m) Per share Weighting Composite value per share DCF 83,653 $ % $7.21 Dividend yield (sustainable) 72,692 $ % $6.27 ROE (sustainable) 82,236 $ % $7.09 Sum-of-Parts 94,514 $ % $8.15 Total $28.73 Total plus notional surplus capital $1.47 $30.20 Table 5 SOP valuation Sum-of-Parts (As Is) 2019e NPAT Pros. PE (times) Value ($m) Per share Australia 3, ,480 $19.14 Asia Retail & Pacific 15-0 $0.00 Institutional 1, ,392 $7.38 Wealth Australia 98-0 $0.00 New Zealand 1, ,764 $6.82 Other ,121 -$0.73 Total 6, ,514 $32.61 Page 7

8 Key segment 6-month trends Table 6 Group Group KPIs 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H18 Growth in NIE 8% 4% 6% 5% 4% 7% 8% 8% 6% 3% 6% 4% -2% -1% -1% Growth in other income 22% -1% -2% 18% 4% -8% 2% 4% 5% -2% -12% 2% -5% -17% -4% Growth in operating expenses 18% 5% 8% 13% -2% -4% 6% 6% 7% 5% 4% 2% -6% -7% -2% Growth in PBT before BDD 8% 0% 0% 6% 10% 7% 7% 7% 4% -2% -3% 5% 1% -4% -2% Growth in loans 13% 13% 9% 8% 10% 13% 12% 8% 9% 9% 1% 1% 3% 1% 3% Growth in deposits 5% 23% 16% 6% 14% 10% 11% 15% 0% -6% 6% 6% 7% 4% 0% NIM 2.46% 2.45% 2.35% 2.28% 2.24% 2.19% 2.15% 2.13% 2.04% 2.04% 2.07% 2.06% 2.00% 1.98% 1.93% Cost ratio 45% 46% 47% 48% 44% 45% 44% 45% 45% 47% 47% 46% 45% 46% 45% Cost / average assets 1.43% 1.37% 1.36% 1.40% 1.23% 1.23% 1.19% 1.19% 1.13% 1.07% 1.07% 1.06% 0.99% 1.00% 0.96% Tier 1 capital ratio 10.5% 10.9% 11.3% 10.8% 9.8% 10.4% 10.3% 10.7% 10.6% 11.3% 11.6% 11.8% 12.1% 12.6% 12.9% Impairment expense / RWA 0.50% 0.39% 0.40% 0.46% 0.37% 0.35% 0.29% 0.26% 0.26% 0.28% 0.47% 0.50% 0.36% 0.24% 0.21% Total provisions + GRCL / RWA 1.95% 1.84% 1.73% 1.59% 1.41% 1.28% 1.20% 1.09% 1.04% 1.00% 1.06% 1.02% 1.02% 0.97% 0.91% ROE 16.1% 15.2% 15.5% 14.7% 15.5% 15.1% 15.5% 15.3% 14.7% 12.9% 9.7% 10.9% 11.6% 11.8% 11.9% Table 7 Australia Australia 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H18 Market share - Loans 11.2% 11.2% 11.9% 12.0% 12.2% 12.4% 12.4% 12.5% 12.5% 12.8% 12.7% 12.6% 12.2% 12.1% 12.1% - Deposits 9.1% 9.2% 9.3% 9.5% 9.5% 9.7% 9.5% 9.4% 9.2% 9.8% 9.9% 9.8% 9.9% 9.8% 9.7% NIM 2.60% 2.56% 2.45% 2.50% 2.53% 2.51% 2.50% 2.54% 2.54% 2.55% 2.75% 2.74% 2.73% 2.73% 2.78% Other income / footings 0.35% 0.00% 0.15% 0.15% 0.14% 0.14% 0.13% 0.12% 0.13% 0.13% 0.12% 0.12% 0.12% 0.11% 0.10% Operating expense / footings 0.51% 0.30% 0.39% 0.38% 0.36% 0.35% 0.34% 0.34% 0.34% 0.33% 0.34% 0.34% 0.32% 0.32% 0.33% Cost ratio 43% 37% 42% 40% 38% 37% 37% 37% 36% 36% 36% 37% 36% 36% 37% Impairment expense / loans 0.18% 0.13% 0.11% 0.15% 0.15% 0.16% 0.14% 0.14% 0.13% 0.15% 0.14% 0.14% 0.14% 0.13% 0.09% Effective tax rate 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% Table 8 Institutional Institutional 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H18 Market share - Loans 4.2% 3.0% 2.5% 2.4% 2.5% 2.5% 2.6% 2.9% 6.1% 5.8% 4.9% 4.8% 4.9% 4.8% 4.9% - Other IEA 5.2% 8.0% 7.4% 7.9% 8.0% 7.9% 8.0% 8.7% 10.2% 10.6% 10.9% 10.8% 9.6% 9.3% 10.0% - IBL 8.1% 11.8% 9.5% 9.8% 9.8% 10.1% 10.3% 11.7% 13.3% 12.4% 12.0% 11.9% 12.2% 12.0% 12.2% NIM 1.31% 1.32% 1.12% 1.06% 0.99% 1.01% 0.98% 0.91% 1.19% 1.21% 1.15% 1.11% 1.08% 0.99% 0.91% Other income / footings 0.24% 0.12% 0.20% 0.16% 0.18% 0.14% 0.15% 0.12% 0.20% 0.15% 0.15% 0.13% 0.22% 0.16% 0.15% Operating expense / footings 0.22% 0.17% 0.20% 0.23% 0.17% 0.16% 0.16% 0.13% 0.22% 0.23% 0.24% 0.23% 0.22% 0.22% 0.20% Cost ratio 35% 37% 35% 49% 35% 37% 38% 35% 47% 51% 56% 59% 47% 54% 54% Impairment expense / loans 0.07% 0.02% 0.08% 0.08% 0.04% 0.02% 0.03% 0.00% 0.02% 0.03% 0.08% 0.10% 0.03% -0.01% 0.01% Effective tax rate 29% 33% 32% 37% 31% 31% 32% 28% 28% 29% 28% 32% 29% 30% 29% Table 9 New Zealand New Zealand 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H18 Growth - Loans -7.6% -11.0% -3.3% 3.0% 4.6% 4.1% 5.3% 5.4% 5.7% 8.5% 10.6% 8.0% 4.3% 3.6% 3.3% - Deposits -9.1% -15.4% -2.8% 9.0% 6.8% 3.5% 8.3% 11.7% 1.4% 3.2% 22.7% 16.2% 7.8% 7.2% 7.0% NIM 2.10% 2.46% 2.63% 2.57% 2.50% 2.49% 2.49% 2.49% 2.52% 2.57% 2.40% 2.35% 2.30% 2.31% 2.37% Other income / footings 0.13% 0.13% 0.13% 0.13% 0.12% 0.13% 0.11% 0.10% 0.10% 0.23% 0.08% 0.08% 0.07% 0.08% 0.08% Operating expense / footings 0.41% 0.34% 0.43% 0.43% 0.36% 0.34% 0.32% 0.31% 0.31% 0.36% 0.30% 0.31% 0.29% 0.28% 0.28% Cost ratio 50% 40% 50% 51% 45% 42% 41% 41% 40% 40% 39% 40% 38% 37% 36% Impairment expense / loans 0.11% 0.14% 0.12% 0.10% 0.04% 0.01% -0.04% 0.03% 0.02% 0.04% 0.04% 0.07% 0.03% 0.04% 0.02% Effective tax rate 34% 26% 28% 27% 28% 27% 28% 28% 28% 27% 27% 28% 28% 28% 28% Page 8

9 ANZ Banking Group Company description ANZ operates primarily in Australia, New Zealand and selected markets in the Asia Pacific region via its Institutional Bank. The Group services 6m customers and provides the following products and services: retail banking; business banking and institutional banking. Investment strategy ANZ s focus is now on the more profitable and higher ROE Australian and New Zealand consumer and business banking space, although we believe there is still some value in selected offshore locations focusing on the institutional including trade finance and high net worth segments. Valuation The price target is closely aligned with the bank s composite valuation, weighted in the table below. Table 10 Composite valuation Composite Valuation Value ($m) Per share Weighting Composite value per share DCF 83,653 $ % $7.21 Dividend yield (sustainable) 72,692 $ % $6.27 ROE (sustainable) 82,236 $ % $7.09 Sum-of-Parts 94,514 $ % $8.15 Total $28.73 Total plus notional surplus capital $1.47 $30.20 Table 11 SOP valuation Sum-of-Parts (As Is) 2019e NPAT Pros. PE (times) Value ($m) Per share Australia 3, ,480 $19.14 Asia Retail & Pacific 15-0 $0.00 Institutional 1, ,392 $7.38 Wealth Australia 98-0 $0.00 New Zealand 1, ,764 $6.82 Other ,121 -$0.73 Total 6, ,514 $32.61 SWOT analysis Strengths 1. Domestic retail and SME banking franchise, including service and sales, and corporate banking; and 2. Management execution. Weaknesses 1. Underweight home lending Australia (although being addressed); and 2. Overweight New Zealand. Opportunities 1. Further cost management; and 2. Divesting non-core businesses (under way). Threats 1. Macroeconomic factors such as higher regulatory requirements, higher regional unemployment and slowing domestic credit growth; Page 9

10 2. Rising wholesale funding costs; 3. Sovereign risk exposed to sometimes unstable governments; and 4. Increased competition specifically from CBA, WBC and NAB on the domestic front in retail and wholesale banking and wealth management. Sensitivities Table 12 Sensitivities Y/e September e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e Sensitivities Group NIM +10bp NPAT upside (underlying basis) 7.8% 8.1% 8.1% 8.2% 8.3% 8.3% 8.4% 8.5% 8.5% - Price target upside $2.36 $2.45 $2.46 $2.48 $2.50 $2.52 $2.54 $2.56 $2.57 Group Loans +1% NPAT upside (underlying basis) 0.6% 0.6% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% - Price target upside $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 $0.20 Aust. loans (ex Wealth/IB) +1% NPAT upside (underlying basis) 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% - Price target upside $0.17 $0.17 $0.18 $0.18 $0.18 $0.18 $0.19 $0.19 $0.19 APEA loans +1% NPAT upside (underlying basis) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% - Price target upside $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 NZ loans +1% NPAT upside (underlying basis) 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% - Price target upside $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 $0.06 Other income +1% NPAT upside (underlying basis) 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% - Price target upside $0.15 $0.14 $0.15 $0.14 $0.14 $0.14 $0.14 $0.14 $0.14 BDD +1% NPAT upside (underlying basis) -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% - Price target upside -$0.03 -$0.03 -$0.04 -$0.04 -$0.04 -$0.04 -$0.04 -$0.04 -$0.04 Costs +1% NPAT upside (underlying basis) -0.9% -0.9% -0.9% -0.9% -0.9% -0.9% -0.9% -0.9% -0.9% - Price target upside -$0.27 -$0.27 -$0.27 -$0.27 -$0.27 -$0.27 -$0.27 -$0.28 -$0.28 Page 10

11 ANZ Banking Group as at 1 May 2018 Recommendation Buy Price $27.47 Target (12 months) $30.20 ANZ Banking Group (ANZ) 1 May 2018 Table 13 Financial summary ANZ Bank Share Price (A$) As at 1-May-18 Market Cap (A$M) 79,629 PROFIT AND LOSS VALUATION DATA Y/e September 30 ($m) e 2019e 2020e Y/e September e 2019e 2020e Net interest income 15,064 14,875 14,656 14,935 15,618 NPAT (cash basis, continuing) ($m) 6,488 6,809 6,861 6,896 7,187 Other banking income 4,058 4,327 4,183 4,118 4,302 EPS (statutory basis) (cps) Total banking income 19,122 19,202 18,839 19,053 19,920 - Growth -27% 11% 2% 5% 4% Funds management income EPS (cash basis, continuing) (cps) Insurance income Growth -22% 15% 1% 1% 4% Operating income 20,608 19,816 19,439 19,665 20,549 P / E ratio (times) Operating expenses -9,588-8,967-8,804-8,821-9,102 P / Book ratio (times) Credit impairment charge -1,933-1, ,025-1,211 P / NTA ratio (times) Profit before income tax 9,087 9,650 9,793 9,819 10,236 Net DPS (cps) Income tax expense -2,588-2,826-2,918-2,909-3,035 Yield 5.8% 5.8% 5.9% 6.0% 6.2% Non-controlling interests Franking 100% 100% 100% 100% 100% Investment experience Payout (cash basis, continuing) 79% 69% 69% 70% 70% NPAT (cash basis, continuing) 6,488 6,809 6,861 6,896 7,187 Discontinued operations CAPITAL ADEQUACY NPAT (cash basis) 5,889 6,938 6,120 6,896 7,187 Y/e September e 2019e 2020e Hedging, one off gains, etc Risk weighted assets ($m) 408, , , , ,810 NPAT (statutory basis) 5,709 6,406 6,537 6,836 7,127 Average risk weight 47% 47% 46% 49% 49% Tier 1 ratio 11.8% 12.6% 13.0% 13.3% 13.2% CASHFLOW CET1 capital ratio 9.6% 10.6% 11.2% 11.6% 11.6% Y/e September 30 ($m) e 2019e 2020e Total capital ratio 14.3% 14.8% 15.0% 15.1% 15.0% NPAT (cash basis) 5,889 6,938 6,120 6,896 7,187 Equity ratio 6.3% 6.6% 6.3% 6.6% 6.6% Increase in loans -6,459-4,441-24,960-25,701-29,259 DIVISIONAL Increase in other assets -24,394 40,415-19,918-12,755-13,532 Y/e September 30 ($m) e 2019e 2020e Capital expenditure Australia Investing cashflow -30,837 36,214-44,834-38,514-42,850 Net interest income 8,202 8,218 8,640 8,925 9,409 Other income 1,206 1,217 1,134 1,195 1,259 Increase in deposits & borrowings 28,550 22,327 19,960 31,739 35,882 Total banking income 9,408 9,435 9,774 10,120 10,668 Increase in other liabilities -4,155-41,018 35,884 1,441 4,348 Operating expenses -3,426-3,382-3,601-3,660-3,796 Ordinary equity raised Impairment expenses Other -4,675-5,088-3,107-1,563-4,568 Net profit before tax 5,062 5,168 5,505 5,668 5,965 Financing cashflow 19,720-23,779 52,736 31,618 35,663 Corporate tax expense -1,515-1,552-1,656-1,705-1,794 NPAT (cash basis, continuing) 3,547 3,616 3,849 3,963 4,170 Net change in cash -5,228 19,373 14, Loans 327, , , , ,536 Cash at end of period 48,675 68,048 82,071 82,071 82,071 Deposits 187, , , , ,245 BALANCE SHEET Asia Retail & Pacific Y/e September 30 ($m) e 2019e 2020e Net interest income Cash and liquid assets 48,675 68,048 82,071 82,071 82,071 Other income Divisional gross loans 577, , , , ,971 Total banking income 1, Provisions -4,183-3,798-3,673-3,977-4,168 Operating expenses Other gross loans / inter div. 1, ,370 3,370 3,370 Impairment expenses Other IEA 234, , , , ,728 Net profit before tax Intangibles 7,672 6,970 5,338 5,338 5,338 Corporate tax expense PP&E 2,205 1,965 1,920 1,978 2,038 NPAT (cash basis, continuing) Insurance assets 35,656 37, Loans 13,370 5,503 1, Other assets 11,082 11,113 51,567 51,567 51,567 Deposits 22,782 9,157 1, Total assets 914, , , ,064 1,035,914 Institutional Divisional deposits & IBL 535, , , , ,978 Net interest income 3,447 3,264 3,020 3,127 3,277 Other borrowings 271, , , , ,347 Other income 1,733 2,366 2,084 2,189 2,300 Other liabilities 49,967 51,889 9,181 9,181 9,181 Total banking income 5,180 5,630 5,104 5,317 5,577 Total liabilities 856, , , , ,506 Operating expenses -2,958-2,814-2,779-2,920-3,034 Impairment expenses Ordinary share capital 28,765 29,088 27,943 28,321 28,713 Net profit before tax 1,479 2,724 2,233 2,264 2,358 Other equity instruments Corporate tax expense Reserves 1, NPAT (cash basis, continuing) 1,041 1,924 1,569 1,585 1,650 Retained profits 27,975 29,834 31,846 36,801 39,028 Loans 125, , , , ,730 Minority interests Other IEA 281, , , , ,420 Total shareholders' equity 57,927 59,075 60,456 65,789 68,408 IBL 227, , , , ,338 Total sh. equity & liabs. 914, , , ,064 1,035,914 Wealth Australia Net interest income WANOS - statutory (m) 2,892 2,910 2,904 2,903 2,916 Other operating income WANOS - underlying (m) 2,907 2,926 2,920 2,918 2,932 Net funds management income Net insurance & other income PROFITABILITY RATIOS Total operating income 1, Y/e September e 2019e 2020e Operating expenses Return on assets (cash, continuing) 0.7% 0.8% 0.7% 0.7% 0.7% Impairment expenses Return on equity (cash, continuing) 10.3% 11.7% 11.6% 10.9% 10.8% Net profit before tax Leverage ratio 5.3% 5.5% 5.6% 6.0% 6.0% Corporate tax expense Net interest margin (continuing) 2.07% 1.99% 1.91% 1.87% 1.87% NPAT (cash basis, continuing) Cost / income ratio (continuing) 47% 45% 45% 45% 44% FUM 48, Cost / average assets (continuing) 1.06% 1.00% 0.93% 0.90% 0.89% Growth in operating income 2% -4% -2% 1% 4% New Zealand Growth in operating expenses 3% -6% -2% 0% 3% Net interest income 2,448 2,519 2,545 2,573 2,655 Jaws (continuing) -1% 3% 0% 1% 1% Other income Effective tax rate 28% 29% 30% 30% 30% Total operating income 3,092 3,172 3,220 3,266 3,374 Operating expenses -1,225-1,193-1,177-1,216-1,237 ASSET QUALITY Impairment expenses Y/e September e 2019e 2020e Net profit before tax 1,747 1,901 1,990 1,961 2,022 Impairment expense / GLA 0.33% 0.21% 0.14% 0.16% 0.18% Corporate tax expense Impairment expense / RWA 0.47% 0.31% 0.21% 0.23% 0.26% Minority interests Total provisions ($m) 4,183 3,798 3,673 3,977 4,168 Investment experience Total provisions / RWA 1.02% 0.97% 0.91% 0.89% 0.89% NPAT (cash basis, continuing) 1,268 1,369 1,433 1,412 1,456 Indiv ass prov / gross imp assets 41% 48% 50% 50% 50% Loans 106, , , , ,451 IBL / IEA 100% 102% 109% 108% 107% Deposits 71,857 76,339 77,620 82,084 87,988 Total provisions + GRCL / RWA 1.02% 0.97% 0.91% 0.89% 0.89% Other IBL 25,268 24,262 23,650 23,332 23,332 SOURCE: BELL POTTER SECURITIES ESTIMATES Page 11

12 Recommendation structure Buy: Expect >15% total return on a 12 month view. For stocks regarded as Speculative a return of >30% is expected. Research Team Staff Member TS Lim Industrials Sam Haddad Chris Savage Title/Sector Head of Research Industrials Industrials Phone tslim shaddad csavage Hold: Expect total return between -5% Jonathan Snape Industrials jsnape and 15% on a 12 month view Tim Piper Industrials tpiper Sell: Expect <-5% total return on a 12 month view John Hester Tanushree Jain Financials Healthcare Healthcare/Biotech jhester tnjain Speculative Investments are either start-up enterprises with nil or only prospective operations or recently commenced operations with only forecast cash flows, or companies that have commenced operations or have been in operation for some time but have only forecast cash flows and/or a stressed balance sheet. TS Lim Lafitani Sotiriou Resources Peter Arden David Coates Analysts James Filius Alex McLean Banks/Regionals Diversified Resources Resources Analyst Analyst tslim lsotiriou parden dcoates jfilius amclean Such investments may carry an exceptionally high level of capital risk and volatility of returns. Bell Potter Securities Limited ACN Level 38, Aurora Place 88 Phillip Street, Sydney 2000 Telephone The following may affect your legal rights: DISCLAIMER This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission, Hong Kong. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client s financial situation, particular needs and investment objectives ( relevant personal circumstances ), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has provided you with this report by arrangement with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Bell Potter Securities Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. DISCLOSURE Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document. The analyst TS Lim owns 200 shares in ANZ. ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. Page 12