Company Brief Analysis

Abstract

Company Name: ANZ BankCountry: New ZealandWriter: Charles GanbaatarWebsite: www.kofact.comEmail: Charles@kofact.com

Further research and analysis can be carried out at readers’ requests.

Purpose:The purpose of this report is to collect information related to the company’s profile, analyze its financial statements and current development, et cetera on the basis of qualitative and quantitative research. It is condensed into a simple and comprehensible format to provide, in a form suitable for all readers, approximate ideas and analysis on the company. In addition, some comparisons to other competitors in the same industry and personal opinion will be made in this report.

Delimitation:The report is delimited to an analysis of this particular company and its financials between two to five years. No other information except for those stated in this report has been taken into consideration. The writer is fully aware of the lack of objectivity since the information and list of competitors used are selected based on subjective judgment. Thus, it is not the intention of this report to hold the position of an expert.

Methodology: Both primary and secondary data could be used; depending on whichever is more appropriate. The primary data consists of company visits and interviews with relevant individuals. Secondary data is collected from annual reports, prospectus, company financials and common applications of Internet and personal research.

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Table of Contents

Introduction 3

Background

Performance overview

Management team

Qualitative Research 4

Industry

The key extracts

Quantitative Analysis 6

Company financialsPart 1.Part 2.

Conclusion8

Opinion

Three tenets

Introduction

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BackgroundANZ Group was established in the UK by Royal Charter in 1835, it is Australia's third largest banking and financial services groups, with current operations extending throughout Australia and offshore in NZ, East Asia and the Pacific Islands.

The bank has been built up over a long period by a series of acquisitions and mergers they embrace some of the oldest names in banking - Union Bank (merged 1951), ES & A Bank (acquired 1970) and Bank of Adelaide (acquired 1979). The New Zealand division comprises Retail and Commercial business units. Retail includes Home Loans and Small Business Banking. Commercial comprises Commercial and Agri.

Performance Overview

The Australia Division delivers profits based on market share gains in key segments. The New Zealand Division also generates profit based on market share gains and strong cost disciplines. In International and Institutional Banking profit was down reflecting the challenging global environment.

ANZ continues to evolve their strategy and accelerate its execution to maximize value for customers and shareholders. But economic growth in the banking industry is slowing down due to intense competition and the growing cost of regulation and market volatility.

ANZ is investing in growth opportunities in New South Wales while across Australia and New Zealand they are continuing to grow market share in Mortgages and Small Business. In International and Institutional Banking, ANZ is focusing on attractive opportunities in Cash Management while stepping away from lower return financial institutions Trade Finance. Growth in Risk Weighted Assets is also being restricted to better manage capital within the business.

Some information was provided by ANZ Bank New Zealand Limited in their half-year report released on 5 May 2015.

Management Team:

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Qualitative Research:

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Industry

Five major banks in New Zealand reported core earnings of $3,480 million in the first half of 2015 financial years, up from $3,281million for previous six months. Most of banks have strong earning performance in both household and non-household sectors. In addition, the reduction in operating expenses also has positive effect on profitability. Bad debt expenses have been an on-going issue since six months ago, up 43% to $181 million. There has been a gradual deterioration in stressed loans as well as assets that are 90-days past due.

The result of this increased profit is due to 5% increase in net interest income, but other operating income continues to show volatility.

Gross lending is currently at $325.2 billion, household lending increased by 2.6% during first-half financial year. The proportion of household lending with LVR above 80% has decreased to 14.5%.

(PWC, 2015) Some information retrieved from: http://www.pwc.com.au/publications/major-banks-analysis.html

The key extracts

Banking Industry Income Chart

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Apart from raising a total of $4.4 million of new equity during the year, there have been no other significant changes in the state of affairs of the Group during the financial year.

Shayne Elliot will succeed Mike Smith as CEO and join the board on 1 January 2016. But Smith will be retained as a non-executive advisor to the board for one year.

8th October the Group decided to sell the Esanda Dealer Finance business to Macquarie Group Limited. Sale price is $8.2 billion.

ANZ promotes to operate in a way that mitigates its environmental impact. ANZ holds a licence under the Water Act 1989 (Vic), allowing it to extract water from the Yarra River for thermal regulation of its Melbourne Head-Office building.

During 2015 the Merchant Services and Commercial Credit Cards businesses were transferred out of the Cards and Payments business unit in Australia Retail and split between Australia C&CB and IIB based on customer ownership.

Australia Division’s strategy is focused on customer growth and improving the customer proposition in all parts of our business.

New Zealand Division’s strategy is focused on maintaining growth in market share in key products, including mortgage lending, business lending, credit cards and deposits.

ANZ’s risk appetite is set by the Board and integrated within ANZ’s strategic objectives. Market Risk stems from ANZ’s trading and balance sheet activities and is the risk to ANZ’s earnings arising from changes in interest rates, foreign exchange rates, credit spreads, volatility, correlations or from fluctuations in bond, commodity or equity prices.

Quantitative Analysis

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Part 1.

Year 2014 2013 2012 2011Profit Margin 21.24% 19.78% 17.53% 14.82%OCF Margin 19.11% 61.50% 21% 61.91%

Profit margin rose steadily from 2011 to 2014 as the result of increasing net profit after tax, and up by 6.87 % since 2013. However, operating cash flow margin slumped from 61.50% in 2013 to 19.11% by 2014 due to a fluctuation in the net operating cash flow during that period.

Consolidated profit after income tax attributable to shareholdersof the Company was $7,493 million, an increase of 3% over the prior year.

Operating expenses increased $599 million (7%) due to higher personnel and technology expenses. Total credit impairment charges increased $193 million (20%) due to portfolio growth and higher provisions in IIB.

Net loans and advances increased by $48 billion (9%) primarily driven by market share growth in retail businesses. Growth in deposits and other borrowings of $61 billion (12%) primarily driven by growth in demand deposits across the Group, and an increase in certificates of deposit and commercial paper in Australia.

Part 2.

Comparison of expenses ($Million):

2015 2014Total personnel expenses (employees etc.) 5,479 5,088Total premises expenses 992 888Total technology expenses 1,462 1,266Total other expenses 1,464 1,405Total operating expenses 9,359 8,760

Conclusion

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Opinion

The current market price is $29.10 (18/11/15), up by $7.6 since 2010.

First of all, it is rather unexpected to learn the amount of total assets owned by ANZ, which is 6.4% higher than its total liabilities. As the result, net worth is only about $49.43 billion. From a simple calculation of assets to net worth ratio of 4.41%, indicates potential vulnerability to solvency and liquidity problems in the future. Some central banks can go broke and probably have done so in developing countries, as result of uninformative balance sheet about their financial resources.

Although it seems quite implausible to see ANZ goes broke and they might have many other ways to safeguard its solvency, but the high and low percentage of liabilities and net worth may undermine its market price stability.

Since ANZ has a very high earning per share ratio to date, I am eager to investigate a little more on its EPS related numbers and quality. Because as investors we always want to protect ourselves and avoid making fundamental mistakes, as it is reasonably easy to evaluate the quality of those reported figures on the financial statements. In this case we need to rely on operating cash flow to determine earnings quality.

ANZ’s EPS adjusted is currently at $2.52 per share; taking operating cash flow and its outstanding shares into account, the true EPS is approximate at $1.94 for 2014. The discrepancy between these two figures tells us that the reported EPS is not a relatively true representation of what ANZ actually earned during this period. The bank is generating less cash than is reported EPS; therefore we can conclude the current EPS has a slightly low quality with overstated cash operating results.

Book value per share is about $10 to $12 lower than its market price per share, and price to book ratio is also higher than average. This simply indicates its overvaluation.

Dividend per share has been increasing steadily, but with a low sustainable dividend cover of approximately 0.85.

At this stage, I am more concerned about ANZ’s debt to equity and its debt service coverage. Having said that, it does have a reasonable low risk percentage regarding lending portfolio. Three tenets and overview:

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TENETS (Scale from 1 to 10)Business Tenet Is the business simple and understandable? 3

Does business have a consistent operating history? 9Does the business have favorable long-term prospects? 5How elastic is the demand for the company’s P&S? 6

Management Tenet Is management rational? 6Is management candid with its shareholders? 7

Financial Tenet The cash generating ability? 5Fixed assets to profits? 6Likely to create more than one dollar of market value for every dollar retained? 7

OVERVEIWIs the demand seasonal or cyclical? High in good times and low in bad.

What are the key projects? A broad range of banking and financial products and services to retail, high net worth, small business, corporate and commercial and institutional customers.

What are the key products and services for the company?

A broad range of banking and financial products and services to retail, high net worth, small business, corporate and commercial and institutional customers.

Cash management, lending, investment, specialist services.

How is the company competitively placed in that segment?

Competitive.ASB, BNZ, Westpac, TSB, SBS, Rabobank etc.

Which locations are key revenue contributors to the company revenues?

Nation wide.

Which product contributes maximum to the company’s profits?

Cash management, lending, investment, specialist services.

Does it have a unique selling proposition?

Uniquely positioned to meet the needs of customers who are dependent on regional trade and capital flows. The strategy is underpinned by rigorous liquidity, capital and portfolio management.

Does the company enjoy an important position in the market?

No.

Sustainable competitive advantage? Unique competitive position.

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