Australia and New Zealand Banking Group (ASX: ANZ) announced another good result for the first half – despite this there are indications the underlying business isn't performing quite as well as headline numbers suggest.
Worries
1. The commercial division continues to perform sluggishly with both margins and volumes down.
2. Growing competition in residential mortgage lending crimping margins and future volume growth.
3. Previously benign impairment cycle is bottoming and may deteriorate.
4. Capital declined to 8.3%; target is 8.5% – 9%. Additional capital is likely to be raised by divestment of minority interests.
5. Trade finance duration is decreasing.
6. Trading profits (mainly foreign exchange) were strong in the first half and could reverse.
Joys
1. Overall loan growth up 5%.
2. Return on equity ok at 15.5%; target above 16%.
3. New Zealand very strong – expenses down 6%, revenue up 3%.
4. Asian strategy gaining traction; 19% of business in first half.
Although the first three worries are also shared by the other domestic banks, ANZ's foothold in Asia may mean it has to meet stricter capital requirements than the other majors in the medium term. If so, this will constrain the ability to increase dividends, even assuming all else is equal.
In common with Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC), ANZ has little investment appeal at current prices.
Macquarie Group Ltd (ASX: MQG) has a dynamic business model with head office essentially a capital allocator dealing with six distinct and almost autonomous business satellites. This 'grass roots' style of management coupled with very strong risk management processes has served Macquarie well over the years and enabled it to come out of the GFC era in a stronger position than most investment banks.
With 68% of the business now sourced overseas Macquarie should continue to benefit from the revitalisation of Asian, UK and North American economies as well as the expected growth in infrastructure across all economies (Macquarie is the global leader in infrastructure assets under management).
Of interest in the report was the performance of the Fixed Interest, Currencies and Commodities division. Macquarie is now the fourth-largest gas trader in the US market (the top three are industry traders). In this area Macquarie doesn't act as principal but provides hedging and trading services to clients. It also acts as a broker between buyers and sellers.
The funds management division had another good year with funds under management rising 23%. This division continues to impress as an important source of annuity style income for the whole group.
In Australia (32% of income) things have been fairly quiet, although CEO Nicholas Moore hints we could see some innovative moves in banking and financial services over coming months.
Macquarie's $30 billion in deposits funds $17billion (1% market share) of the mortgage book and further growth can be expected.
Ever the prudent entrepreneur, Macquarie Group has now established significant niche momentum in global markets and offers good buying below $65.
Foolish takeaway
By nature financial services such as banks are leveraged to the economies they operate in – with the Australian economy facing much needed adjustments some disruption can be expected. This factor alone makes me very cautious about the medium-term outlook for domestically focused banks. On the other hand investment bank Macquarie Group has access to more productive economies and the benefits this brings.
