ANZ’s sneak-peak into 1H22 result follows two recent downgrades

ANZ (ASX: ANZ) has provided a sneak-peak into its interim result, due out May 4th, by this morning flagging a $43m net after tax charge of $43m but notes minimal impact on its regulatory capital.

The bank incurred a $123m customer remediation charge, made to cover increased program costs and a $126m tax change relating to withholding tax on a dividend payment from ANZ PNG.

These large/notable items have been offset by a $205m gain on divestments and business closures, driven by the gain on sale of the Merchant Acquiring Business in exchange for a 49% in a new ANZ Worldline Payment Solutions partnership.

There was also a $1m gain on restructuring charges, divested business results and a litigation settlement.

Morgans downgrades

Today’s market update follows yesterday’s downgrade by Morgans from Buy to Hold as growth in home lending continues to disappoint, mainly due to lower margin loans, and the broker's price target is lowered to $26 from $30.

Despite the benefits of rising interest rates on net interest margins (NIM), the broker has assumed a more cautious stance on the banking sector with new environment heightening the risks of deteriorating asset quality and reduced attractiveness of dividend yields.

The broker suspects rising interest rates will mean term deposit rates normalise, resulting in Term Funding Facility (TFF) drawdowns being refinanced with conventional sources of funding: Deposits in general, the broker adds may also flow out of the banking system.

The broker noted:

“Whilst ANZ’s Institutional business provides it with potentially strong leverage to rising rates, ANZ’s Australian home lending continues to disappoint in terms of growth.”

Moreover, it appears the limited growth ANZ is achieving is being driven by less complex, low-margin home loans. We consequently see risk of ANZ disappointing in the near term by way of loan growth and margin performance.”

Morgan Stanley downgrades

Yesterday’s downgrade by Morgans follows a downgrade by Morgan Stanley to Equal-weight from Overweight 12 April.

The broker cites ongoing challenges in Australian retail and business banking, a weaker outlook in NZ and uncertainty around group costs.

Morgan Stanley expects market share loss, falling margins and lower non-interest income to impact upon revenue this year and the price target is lowered to $28.60 from $30.30.

Relative to peers, the broker expects the bank to have weaker volume growth and more headwinds from increasing competition for deposits in A&NZ.

Citi upgrades

Having concluded that the Reserve Bank's tightening cycle is destined to reshape the bank sector’s earnings profile over the next two and a half years, Citi has raised the sector outlook to positive with forecast earnings changes of more than 10%.

The broker expects the cash rate to hit 0.75% by the end of 2022, and 1.75% by the end of 2023.

Despite issues around credit quality, the broker’s analysts foresee NIMs returning to pre-pandemic levels, materially above consensus, and favours 'cheaper' majors like ANZ and has raised the target price to $30.75 from $29.25.

ANZ was around 1% higher the open today.

Consensus on ANZ is Moderate Buy.

Based on Morningstar’s fair value of $31.57, the stock appears to be undervalued.

ANZ share price performance: A 12-month snapshot.