Is the Australia and New Zealand Banking Group (ASX: ANZ) share price a buy after the major ASX bank released its FY20 third quarter update?
I can't remember being as interested in an ANZ third quarter update as the one that it just released.
What was in the update?
ANZ reported that its FY20 third quarter saw $1.33 billion of statutory profit generated, compared to the FY20 first half quarterly average of $773 million.
Continuing operations cash profit was $1.5 billion, up from the FY20 first half quarterly average of $707 million.
Continuing operations cash profit excluding notable items was $1.6 billion, up from the FY20 first half quarterly average of $1.23 billion.
Firstly, it's good to see that ANZ is still generating a decent amount of profit even during this difficult period. I think that's one of the main reasons that the ANZ share price has held up as much as it has.
ANZ's credit quality is key during this period. In the first half of FY20 ANZ recognised a total provision charge of $1.67 billion. In the third quarter ANZ recognised a further $500 million credit provision.
Higher credit provisions is a drag on profit. Bad debts have been lower for years as interest rates come down and property prices rise. I think the ASX banks like ANZ might be facing higher bad debt charges for a number of years. It takes a while for houses to go through the bad debt process and for them to be eventually sold.
In terms of the common equity tier 1 (CET1) ratio it was 11.1% at 30 June 2020. The pro forma CET1 ratio was 11.3% after adjusting for the conversion of New Zealand capital notes in 2022 and the announced sale of UDC to Shinsei Bank Limited. That's a pretty good capital position to be in at this stage. A stronger balance sheet is good for the ANZ share price.
COVID-19 has been impacting the economy for several months already. But ANZ remains in a solid position.
ANZ also said that its home loan growth has been faster than the market whilst it has also seen strong deposit growth.
ANZ dividend
The ANZ board announced a 2020 interim dividend of $0.25 per share, fully franked. It will have NZ$0.03 cents of imputation credits for New Zealand investors.
The decision was made after considering ANZ's continuing capital strength with the latest APRA dividend guidance, whilst taking into account shareholder needs for income with the uncertain future impact of COVID-19.
ANZ said that the interim dividend represents 46% of its FY20 first half profit, or 30% of the FY20 first half once the impairment for Asian associates at 31 March 2020 is excluded. The impairment didn't impact capital.
Is the ANZ share price a buy?
ANZ is seeing a rising amount of home loans that are more than 90 days overdue. Will the economy be able to recover before ANZ decides that these loans have been unpaid for too long?
In Australia there are around 84,000 deferrals in place for home loan accounts at 31 July 2020 valued at $31 billion, being 9% of its Australian home loan accounts. There are also 22,000 business loans at 31 July 2020 valued at $9.5 billion, representing 14% of commercial lending exposures.
I think FY21 could be difficult for ANZ. Plenty of sectors are still troubled including travel, tourism and so on.
If the economy can bounce back in FY22 then maybe ANZ is trading cheaply, perhaps on a high single digit forward p/e ratio. The ANZ share price won't fully recover until it seems as though the ANZ earnings are on track to fully recover.
The RBA interest rate is likely to stay lower for at least a few years, which is likely to hamper ANZ's net interest margin (NIM). For that reason and the current difficult conditions, there are plenty of other ASX shares I'd buy first.
