ANZ an 'inexpensive play on Australia rate gearing': UBS

Australia and New Zealand Bank (ASX: ANZ) shares sold off -3.3% last Thursday on a seemingly positive FY22 result that displayed a major turnaround for all-important net interest margins.

Analysts at UBS said the $6.5bn full-year profit was a 3% beat relative to consensus and operating revenue was in-line with the investment bank's estimates.

Cost pressures were among the few negatives in the result, with total expenses up 6.5% to $9.17bn. UBS notes that operating expenses were a 'big focus of results' and 2% ahead of its estimates.

Looking ahead, ANZ said it expense trends will likely be impacted by wage and vendor cost inflation as well as one-off costs arising from its Cashrewards acquisition and the formal separation of its Wealth business.

Revenue tailwinds to kick on

"We delivered our first double digit revenue growth for a half since 2009 - with all four of our divisions performing strongly," said ANZ CFO Farhan Faruqui.

Net interest margins recovered strongly in the second-half, at 1.68% from 1.58% in the first-half. For the full year, margins were 1.63%, ahead of consensus expectations but below UBS estimates of 1.65%.

"ANZ's rate sensitivity has reduced based on UBS estimates but the bank will benefit from the full weighted average pass through of rate increases," the analysts said.

"ANZ has guided for net interest margin expansion of ~17 bps for FY23e (+$1.5bn uplift in net interest income) based on an expected 3.60% cash rate."

"Given that 17 bps of net interest margin expansion came from deposit pricing, mix changes and higher costs could impact it," the analysts warned.

Buy rating reiterated

UBS retained a Buy rating on ANZ with a $30.0 target price and 5.8% dividend yield forecast for FY24.

The analysts upgraded the bank's cash earnings per share outlook by 6-9% for FY23-25 driven by 'stronger net interest income and a lower bad debt outlook.'

"At 10.5x price-to-earnings (2-years forward) well below its historical average of 11.4x and a ~19% discount to the ASX 200 banks index, we view ANZ as an inexpensive play on Australia rate gearing and remain positive on the stock," said UBS.

ANZ share price chart