The ANZ Group Holdings Ltd (ASX: ANZ) share price went up 7.6% during the Australian 2023 financial year. But it was an underperformance against the S&P/ASX 200 Index (ASX: XJO) which rose by close to 10%.
As one of the largest ASX bank shares, what happens in the banking industry can have an important effect on the bank's profitability and investor confidence in the business.
Around a year ago, the ASX share market was going through considerable volatility. Investors were digesting what strong inflation and the 50 basis points (0.50%) interest rate increase meant for banks and the wider economy.
With that as the starting point, ANZ shares managed to recover over the next 12 months to finish the financial year at $23.71 apiece.
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Rising profitability
Higher interest rates were seen as a positive for the banks — at least for the first six or so months. Banks like ANZ were passing on interest rate hikes to borrowers faster than to savers. This led to an increase in the bank's net interest margin (NIM). Banks were also boosted by the higher earnings on everyday transaction accounts that don't pay large interest like savings accounts do.
In the first half of ANZ's FY23, ANZ reported a 12% rise in (continuing operations) cash profit and a 9.4% rise in the interim dividend per share to 81 cents per share.
On 9 February 2023, the ANZ share price had almost reached $26, as we can see on the chart below. It's down 8.5% since then.
However, the NIM may have peaked because of one main factor.
Strong competition
Many banks have spoken about how competitive the banking space is right now. Out of a choice of losing market share or losing margin, many seem to have chosen to lose a bit of margin.
While the competition has somewhat helped to keep a lid on rates for households, interest rates are still a lot higher and there is an understandable expectation that some households and businesses may struggle.
A couple of months ago, ANZ CEO Shayne Elliott said:
The next six months will be more difficult than the last. Competition in retail banking is as intense as it has ever been, both in Australia and New Zealand. We understand that sustained higher inflation and interest rates create further challenges for some households and businesses across the economy. While the number of ANZ customers in difficulty remains low, we stand ready to help in these potentially challenging times.
We enter the next half with a business structure that brings the benefits of geographic and product diversification. We have a robust capital position, credit loss provisions higher than any other time pre-COVID, a strong and diverse deposit base and a track-record of execution. We are seeing continued momentum and high employee engagement across all four divisions, each with a clear strategy and a funded roadmap for growth.
Interestingly, the ACCC has concerns about ANZ's attempt to try to acquire the banking division of Suncorp Group Ltd (ASX: SUN) because the regulator doesn't want a lessening of competition.
ANZ share price valuation
The ANZ financial year runs to the end of September, so there are still a few months to go.
According to Commsec, the bank is projected to generate $2.45 earnings per share (EPS) in FY23 and $2.25 in FY24. That means it's valued at under 10 times FY23's estimated earnings and under 11 times FY24's estimated earnings.
