Australia | Oct 27 2006
By Chris Shaw
ANZ Banking Group (ANZ) yesterday surprised the market with a profit result around 1% higher than consensus estimates at $3,560m, thanks in large part to a bad debts outcome far lower than even management had expected.
With the result beating broker forecasts there have been upgrades, with GSJB Were lifting its earnings per share estimates in FY07 to by 2.2% to 206.3c, in FY08 by 3.8% to 223.3c and in FY09 by 4.4% to 239.4c, while Deutsche Bank has increased its forecasts 2-3% to 211c, 227c and 240c respectively.
ABN Amro is even more aggressive with its estimates, forecasting earnings per share of 214.7c, 235.3c and 255.4c, which compares to the median forecasts according to Thomson One Analytics of 208c, 225c and 237c.
While this is clearly a positive it has not led to any significant changes in broker ratings on the bank, Deutsche Bank suggesting it is hard to get excited as even though it was a good result the current share price puts the bank on only a 4% discount to its peak forward Price/Earnings ratio of the past 10 years.
It also notes the very low bad debt result remains a swing factor in coming periods as a return to more normal levels, which management is anticipating, will put pressure on future earnings growth. It does note though the bank appears the best placed among its peers in terms of its collective provisions for bad debts.
ABN Amro takes a slightly different view, suggesting the bad debt outcome is actually a positive for the sector as a whole and sees potential for the other banks to surprise on the upside when they report in coming weeks (Westpac (WBC) on November 2, National Australia Bank (NAB) on November 3). At the same time it notes the low bad debt outcome raises the bar for the company in terms of delivering on earnings growth forecasts next year given the comparative figure will be more difficult to beat.
Despite this, the broker suggests investors look to switch out of Commonwealth Bank (CBA) and into ANZ as the latter is trading at a slight discount and so offers better value. SB Citigroup agrees the bank is the pick of the sector, though it sees limited upside potential given the shares have already risen more than 20% in the past year.
Credit Suisse doesn’t rate the stock as highly, putting it third behind both National and Westpac given the valuation discount it had enjoyed is now all but gone. Deutsche Bank notes there remains some earnings risk as the company generates 23% of its revenues from New Zealand compared to 10-21% for its peers, which is not such a favourable position in the broker’s view as it suggests the New Zealand economy has yet to bottom.
JP Morgan is also cautious as it notes while the result was good there remains the question of what can the bank buy to fulfil its Asian expansion plans, as while it has around $1bn to spend the timetable for such investment remains uncertain.
Following the result the FN Arena database shows ANZ is now rated as Buy three times and Hold seven times, with an average share price target of $29.99, up from $29.13 prior to the result. By way of comparison, Thomson One shows a median price target of $28.20.
After moving higher yesterday ANZ shares have continued to post gains today despite a weaker overall market, as at 11.30am the stock was up 25c at $29.00. In contrast, Commonwealth Bank shares are unchanged as ABN Amro points out the better than expected ANZ result makes it more difficult for the bank to meet its guidance of earnings growth in line with or better than that of its peers.