Just in case you’re thinking of buying ANZ

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Try some Brian Johnson of CLSA who is all class:

1H16 cash earnings of A$2,782m bore the brunt of A$717m of non-operational specified items (capitalised software –A$441m, restructuring –A$101m, AMBank impairment –A$231m, Esanda gain +A$56m), but even excluding these items, pro forma cash earnings of A$3,499m (2H15 A$3,540m) missed consensus by ~2%. Relative to consensus, the “pro forma earnings” missed on NIM, non-interest revenues and costs. ANZ cut the 2016 interim dividend to 80¢ (2015 interim 86¢, final 95¢, FY DPR 71.2%) and formally lowered the target payout from 70-75% to 60-65% with the FY16 final dividend to be “not less than” the 80¢ interim. We reduce FY16CL cash EPS by 11% and thereafter by ~3% with a flat 80¢ per half dividend for an extended period. ANZ is the most vulnerable bank to asset quality shocks given an above-peer lending risk profile (Asian lending, resource lending, NZ dairy, etc, ie ANZ’s own Economic Profit disclosure suggests an Economic Loss charge of 36bp of GLA) but a sub-peer Collective Provision Overlay (ANZ A$25m, CBA ~A$320m, NAB ~A$372m, WBC A$393m). From our perspective, the sole “highlight” was the disciplined runoff of low return/capital intensive assets in Asia but the 1H16 reported CET1 of 9.81% declined to 9.3% on an ex-dividend basis and 8.67% on apro-forma basis adjusting for “known” changes on housing/market risk weightings. This still leaves ANZ short A$7.6bn of CET1 relative to our expected 10.5% CET1 target. Considerable regulatory capital uncertainties remain from both APRA (FSI recommendation “unquestionably strong”) and BCBS (Advanced IRB credit models, standardised credit weightings, operating risk, market risk, leverage, investor home loans). As is the case for peers’ sub-cycle loan losses/tax, we still think ANZ is set to over-earn in FY16 (ANZ by ~4.2%) but a further rise in regulatory capital intensity could trigger a decline in the sustainable dividend payout ratio from our forecast FY16 66% to 60% which could equate to a further 9.7% EPS decline vs a further 17.5% DPS decline. Target price target rolls down from A$20.90 to A$20.30 and FY 17 and 18 eps cut 2 to 3%. SELL.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.