The Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price may be a buy according to fund manager Rhett Kessler from Pengana Capital Group (ASX: PCG).
A quick overview of ANZ
ANZ is one of the biggest banks across Australia and New Zealand. It has a market capitalisation of $65.4 billion according to the ASX.
It’s one of Australia’s biggest banks along with Commonwealth Group of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB).
What happened in the latest result?
ANZ reported its FY20 result to investors just over a month ago.
Its profit had a difficult year with (continuing operations) cash profit falling by 42% to $3.76 billion. Statutory net profit after tax fell by 40% to $3.58 billion.
When ANZ excluded certain items, the profit decline didn’t look as steep. Profit before the credit impairments and tax fell by 16% to $8.37 billion. Profit before credit impairments, tax and large notable items only fell by 1% to $10.1 billion.
The ANZ share price has gone up over 20% since the release of the result. But there are have been other major news items since then such as the US election winner and the effectiveness of COVID-19 vaccines.
The major ASX bank explained that the total provision charge in the second half was $1.06 billion and followed the $1.67 billion charge taken at the first half. The bank wanted to strengthen its credit reserves for its retail and commercial customers affected by COVID-19. The collective provision balance increased to $5 billion at 30 September 2020.
ANZ revealed that its gross loans and advances increased by 1% to $622 billion whilst customer deposits grew by 8% to $552.4 million.
Its common equity tier 1 (CET1) ratio declined by 2 basis points to 11.3%.
Why the ANZ share price may be a buy
Mr Kessler from Pengana said there are a few reasons why his fund recently increased its exposure to banks including ANZ shares.
The first point was accelerating home loan growth (supported by low-interest rates and first homeowner support). The second point was a supportive federal budget, improving housing finance approvals and house prices holding up better than expected. The third point was a meaningful reduction in loan deferrals. The final point was lower than anticipated loss provisioning.
What about the dividend?
In FY20 ANZ decided to reduce its dividend by 62.5% to $0.60 per share. Under the Australian Prudential Regulation Authority’s (APRA) guidance, banks were limited to paying dividends of 50% of the statutory profit.
There is now talk that APRA may end those dividend restrictions. According to reporting by ShareCafe, APRA boss Wayne Byers told a Sydney finance conference that:
“We have deliberately never put in place guidance for a long period of time. Obviously we will be minded how the situation has evolved. On the whole, I think the outlook has improved, bank capital has certainly increased, the economic situation looks more positive. I think it is time we look at the issue again.”
At the current ANZ share price it has a trailing grossed-up dividend yield of 3.7%. According to Commsec, it’s valued at 13x FY22’s estimated earnings. By FY23 it’s projected to be paying an annual dividend per share of $1.41, which equates to a forward grossed-up dividend yield of 8.6%.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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