You are using an older browser version. Please use a supported version for the best MSN experience.

The best performing big bank stock just got hit with a downgrade

The Motley Fool logo The Motley Fool 3/6/2019 Brendon Lau
a graffiti covered wall: big four banks 16:9© Provided by The Motley Fool, Inc big four banks 16:9

The top performing big bank in 2019 got dropped from Citigroup’s “buy” list as the broker warned that any capital return could be put on ice till FY21 or later.

The Australia and New Zealand Banking Group (ASX: ANZ) share price didn’t suffer much on news of the downgrade with the stock adding 0.2% to $27.78 on Wednesday, which takes the ANZ share price gains since January to nearly 14%.

That’s well ahead of its peers. The Westpac Banking Corp (ASX: WBC) share price is in second spot with a 9% jump, followed by the scandal-ridden National Australia Bank Ltd. (ASX: NAB) share price increase of 6% and the Commonwealth Bank of Australia (ASX: CBA) share price at 3%.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up close to 11% over the same period.

Mortgage volume decline

But ANZ’s share price dominance could be under threat as Citi believes the bank will come under earnings pressure as its mortgage volume headwinds persist even as the broker modestly upgraded forecasts for the wider sector.

The broker has downgraded its recommendation on ANZ to “neutral” from “buy” and lowered its price target by 50 cents to $30 per share.

“ANZ mortgage volume growth turned negative in 1Q19 amidst a perfect storm of responsible lending policy changes and a pivot to OO P&I [owner-occupier principle and interest] loans, with leading brokers and customers seeking service elsewhere,” said Citi.

New Zealand headwind

The broker also pointed out the headwind caused by the Reserve Bank of New Zealand (RBNZ), which is considering lifting the capital requirement ratio of banks operating in its market.

The proposed lift in the regulatory ratio is aimed at better protecting the New Zealand economy from shocks but that will force banks to set aside more cash which can’t be lent out for loans or to fund capital returns to shareholders.

The RBNZ has not decided on this issue and is still consulting with stakeholders. A decision may not be made till towards the end of this calendar year and that will leave the big four ASX banks in limbo as they all have operations in New Zealand.

Don’t wait up for your capital returns

More importantly for ANZ shareholders, this means the bank is likely to postpone any capital return initiatives until an outcome is known.

ANZ is seen to be the best placed to undertake more capital returns, although CBA is also though to be in a position to announce some kind of cash-back through a share buyback or dividend.

“We lower our FY19E EPS by ~1% [for ANZ] reflecting lower volumes. However, the compounding effect of lower volumes and pushed out capital returns sees FY21E EPS lowered by ~5%,” said Citi.

“We note that capital returns are essentially pushed out of our forecast period.”

However, Citi has made small upgrades across the rest of the sector to reflect easing medium-term competition and pressure on margins.

The only two big banks the broker has a “buy” on are NAB and Westpac.

JUST RELEASED: Our Top 3 Dividend Bets for 2019

NEW! The Motley Fool’s team of crack analysts has just released a timely report revealing the names and codes of their top 3 dividend share recommendations for 2019. Be among the first investors to get access—FREE, for a strictly limited time. You’ll discover the names of 3 hefty dividend paying companies with what our analysts consider to be solid growth prospects for the year ahead…

The first two currently offer fat, fully franked yields and the third is a surprising REIT offering you the chance to become a landlord with none of the hassle! If you’re looking for hot new ideas, look no further. But you do need to hurry. Snap up your free copy now, before supplies run out!

Simply click here to grab your FREE copy of this up-to-the-minute research report on our top 3 dividend share recommendations right away.

More reading

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.


More from The Motley Fool

The Motley Fool
The Motley Fool
image beaconimage beaconimage beacon