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ANZ share price: what do 3 of Australia’s leading brokers think?

Australian brokers seem cautious on the Australia and New Zealand Banking Group’s prospects heading into the bank’s full-year 2019 results.

ANZ share price in focus Source: Bloomberg

A tidy A$559 million remediation bill.

That was the news that ANZ announced to the market earlier this month. This didn’t do as much to ANZ’s share price as one may have thought, though. In fact, it has risen modestly since that media release.

Investors after all, already knew that remediation costs were coming – just not the magnitude of such costs. Even so, the flagging of these costs gave some of Australia’s leading brokers a chance to restate or alter their current views on ANZ.

Indeed, with ANZ’s full-year FY19 results set to be released this Thursday – October 31 – we take a look at the current outlook for ANZ from three of Australia’s leading brokers.

The Credit Suisse view – underperform

Overall, Credit Suisse was actually surprised by the significance of ANZ’s remediation bill – believing that ANZ had made further progress than it evidently had on such matters.

Yet the real material impact here comes by way of potentially under pressure near-term earnings and extended margin stress. Consequently, the investment bank has revised its 2H19 cash estimates for ANZ down by A$336 million.

Credit Suisse used this as a chance to reiterate its underperform rating and a share price target of A$27.80 for ANZ.

Finally, it is important to note that in the current ultra-low interest rate environment – all of the big four face margin pressure – not just ANZ. The remediation costs between the big four also vary greatly: NAB recently flagged A$1.2 billion in remediation charges, and when CBA released their full-year results in August, we previously wrote:

‘All up, in 2019 the bank paid out A$2.2 billion in customer remediation costs, up from A$1.0 billion the year prior.’

Morgan Stanley – equal-weight

Secondly, Morgan Stanley looks to be the most bearish of the three brokers – slapping ANZ with an equal-weight rating and a price target of A$26.00.

The investment bank used ANZ’s remediation announcement to reiterate the following thesis: that is, it’s unlikely that ANZ will action any buy backs in the near term – though the key limiting factor on this front remains the potentially stricter CET1 requirements proposed by New Zealand’s central bank. As a further result of the remediation news, Morgan Stanley reduced their 2HFY19 cash profit estimates by 9%.

Maybe most importantly, not only was the remediation charge of A$559 million significantly ahead of Morgan Stanley’s previous estimates; but the investment bank predicts an additional A$425 million in remediation charges across the 2020 and 2021 fiscal years.

Overall, how such potential costs could impact ANZ’s share price remains to be seen. Though Morgan Stanley’s argument that ANZ will cut its dividend as much as 10% in FY20 could indeed have an impact, given ANZ’s appeal as a reliable dividend payer to income-focused investors.

Citibank – neutral

Uncertainty looms large over Australia’s banking sector, says Citibank. Specifically, Citi notes that it remains unclear just how close we are to a sector-wide finalisation of remediation calculations. Indeed, ANZ’s reviews of such matters remain ‘ongoing’ and this A$559 million charge should not be considered the final remediation cost(s), suggests Citi.

In response to this, Citi cut their FY19 EPS forecasts by 6%, maintained their neutral rating and slapped a price target of A$29.00 per share on ANZ. Interestingly however, Citi simultaneously raised their FY20 EPS estimates for ANZ by 1%.

ANZ currently trades at A$27.88 per share – some 16.85% higher than it did in January.

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