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.
