Macquarie thinks Australia and New Zealand Banking Group shares can outperform

Following a somewhat messy but ahead of consensus forecasts first-half result, there are solid signs that Australia and New Zealand Banking Group (ASX: ANZ) should be a preferred pick among the major banking stocks. 

On first blush, the reasons why ANZ is a good pick may not be obvious. Despite underperforming the S&P/ASX 200 Index and most banking peers in the year to date, ANZ is not looking that cheap on a relative P/E basis.

According to Reuters, ANZ is trading on a P/E of 12.7 times, compared to National Australia Bank Ltd. (ASX: NAB) on 13.2 times, Commonwealth Bank of Australia (ASX: CBA) on 13.1 times and Westpac Banking Corp (ASX: WBC) on 12.5 times. 

Secondly, whilst ANZ offers a solid yield, it is in line with the other major banks. It offers a yield of 5.9%, compared to CBA’s 6.0%, Westpac’s 6.6% and NAB on 6.8%, according to Reuters’ estimates. 

Thirdly, it was tricky to ascertain the underlying trends in the bank’s first-half numbers, given the number of one-off items related to divestments as ANZ continues with its restructuring efforts. 

On Tuesday, the bank reported a 14% rise in first-half net profit to $3.3 billion and a 4% lift in cash profit of $3.5 million. The interim dividend was 80 cents per share fully franked, representing a payout ratio of 66% of cash profit on a continuing basis.   

However, investors should focus on potential earnings per share growth and valuation going forward, despite ongoing turmoil in the banking sector.

It is expected that the bank should deliver higher dividends and more buybacks as it continues with its restructuring efforts, supporting earnings growth. 

Macquarie Group Ltd (ASX: MQG) is one broker that supports this view. The broker maintained its “Outperform” rating on ANZ post the first-half result and says it sees longer-term value as ANZ simplifies its business and manages its expenses better than peers. 

“Ultimately, ANZ should have a simpler and higher-returning business,” it said in a report.  

“In our view, ANZ remains well placed to deliver better EPS growth than peers in FY17-20, underpinned by ~$6bn of buybacks (as a result of surplus capital and a lower payout ratio than peers).” 

Citigroup also agrees saying the potential for higher dividends and/or buybacks should provide valuation support for the bank. 

“ANZ’s buyback program has only just begun, and we expect a combination of dividend increases (subject to franking) and buybacks to continue to grow from FY19 onwards,” it said in a report. 

Citigroup also maintained its “Buy” rating on the bank following the first half result 

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